Sunday

Discrepancy trade US Government bonds

Further to the previously discussed discrepancy trading between equity indices, the other discrepancy trade worth looking into is between short and long term US government bonds. This is a favourite among bond traders, as you may have heard the term ‘yield-curve’. US treasuries is being described as the last bubble on earth and the recent crash in 30-yr bond yields have even the most experienced traders gob-smacked. As Jim Rogers said in a recent interview, ‘it is beyond comprehension why anyone would lend money to the US government for 30 years at 3-4%’. During this recent period the yield difference between the 10 and 30 year bond-yields narrowed to 0.4%! This ‘flattening’ of the yield curve has provided a perfect scenario for the discrepancy trader.

As we believe in future hyperinflation, there is no doubt long term bond yields will have to go up. In the mean time, short term yields will remain low whilst the US keep their interest rate at zero percent. The longer the US keeps interest rate at zero percent, the worse the future inflation and the wider the yield difference will become. I am going long the 10 year and short the 30 year, but you can trade any combination of short and long term bonds you like. The yield difference between the 10 and 30 year bonds has widened over the past week by 0.25% and now stands at 0.67%, so it may pay to keep monitoring and look for it to close up a bit again before you jump in.

simple and useful link:

http://finance.yahoo.com/bonds