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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: valueminded who wrote (48805)	2/25/1999 11:36:00 AM
From: Knighty Tin	Respond to of 132070

Chris, I have several, but most at tough to do (long Treasuries, short junks, long treasuries, short munis, etc). One I put on and removed this morning was fairly easy, but not especially cheap in total cost. I bought the August 8 1/8 of 2021 and shorted the stripped principle zero of the same date. They were yielding nearly the same rate in October, a little over 5%, about 5.03%, if my memory is correct. I think the zero was 2 basis points higher yield, at 5.05%. Yields were going down forever, so bulls rushed in to lock them in. Youd lock in with zeroes, so the spread was not as high as it usually is. Since then, they have both backed up in rates, to 5.81% and 5.92%, respectively. Here is the scam: I was able to make a 9 basis point spread on the face value. But the zeroes don't pay a current coupon, and I was collecting interest on my coupon bond the entire holding period AND getting a short rebate on my short zero. This is a classic bear paired trade that worked. In a bear market, zeroes will underperform coupon bonds. Also, premium coupon bonds, and this one was selling for 35 points over par, back off more slowly than the current bond because they have a larger coupon. Add to that the fact that they are much higher yield than current bonds and you have a nice spread. Yes, if rates had continued to fall, I would have lost money, as the opposite side of the trade is also true. Zeroes go up more when yields are falling. Right now, I am temporarily neutral on bonds. I expect a short term rally and then a chance to cream then again. I still have on lots of bearish spreads and paired trades, but many have come off the table and many more will over the next couple of days. However, I don't think paired bond trading makes sense for an induvidual. The quantities you need to do to overcome friction and implied commissions simply don't work for individuals. Also, in the partnership account, I get a great short rebate. I don't in my personal accounts. That makes a big difference. MB