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Jurassic


Total Posts: 172
Joined: Mar 2018
 
Posted: 2018-08-19 19:27
What is the difference between a spread trade (lets say in Rates/Credit space) thats set up to earn the difference in carry and one that aims to profit from mean reversion?

tbretagn


Total Posts: 262
Joined: Oct 2004
 
Posted: 2018-08-19 20:50
Well let's say I look at 1y rates 14y fwd vs 15y fwd vs 16y fwds. Maybe that spread is out of whack and will mean revert but the carry is flat.
On the other hand if I look at 2s5s i might just care about the carry, while not caring about where the level is (because I want to earn more juice)
So as a spread you will have to care about the carry because it costs if you are playing mean reversion, but sometimes there's none and sometimes all you care is the carry.

Et meme si ce n'est pas vrai, il faut croire en l'histoire ancienne

day1pnl


Total Posts: 47
Joined: Jun 2017
 
Posted: 2018-08-20 01:01
usually carry is an order of magnitude smaller than other greeks on the trade, so *time horizon* is longer for carry trades (usually I'd say).

Jurassic


Total Posts: 172
Joined: Mar 2018
 
Posted: 2018-08-26 23:59
Ok, so if we had say company A has 10Y bond at 5% and company B has 10Y bond at 8%. If you buy bond_B, sell bond_A i could earn the difference in yield. But this could all change depending on mean reversion effects

day1pnl


Total Posts: 47
Joined: Jun 2017
 
Posted: 2018-09-01 10:17
If you plan to just stick bond B at 8% in your books and warehouse it there by funding it cheaper by repo and selling an "arbitrary" bond A at 5% then its a carry trade. Time horizon might be years. In this case bond B is the carry and bond A simply plays the role of funding the long trade in bond B. (you can fund the trade by other means too)

But lets say both bonds have on average traded at 5% yield because they are *somewhat similar*. Then for some reason one day bond B blows out to 8%. You might argue that bond at 8% yield is now "too cheap" relative to the similar bond A yielding 5%. So you hedge out bond A against B hoping to capture the tightening back to when the two bond yields have converged, then its a mean reversion trade. (you make most of your money on the dv01 x spread tightening when you unwind it again). Time horizon might be few days to some weeks usually.

Jurassic


Total Posts: 172
Joined: Mar 2018
 
Posted: 2018-09-01 10:38
> So you hedge out bond A against B hoping to capture the tightening back to when the two bond yields have converged, then its a mean reversion trade.

what do you mean by hedge out bond A against B?

day1pnl


Total Posts: 47
Joined: Jun 2017
 
Posted: 2018-09-01 10:40
sell it as a hedge

Jurassic


Total Posts: 172
Joined: Mar 2018
 
Posted: 2018-09-01 10:48
with equal dv01?

day1pnl


Total Posts: 47
Joined: Jun 2017
 
Posted: 2018-09-01 19:11
yes, for instance
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