Rates'n'Risk - Part III

Deep dive into the rates market and its application to Macro

Part 3 is where I try to turn all of this into something that actually makes money. Because it’s one thing to correctly diagnose what the curve is saying. It’s another thing entirely to express that view in a way that’s clean, survives noise, and doesn’t accidentally load you up with risks you never intended to take.

This is the part most people skip. They go straight from I think yields are going down to buy duration, and then they spend the next week confused when the curve does something slightly different and their P&L looks nothing like their thesis. In rates, you can be right on direction and wrong on driver, and that’s enough to lose money. A lot of money.

So my approach is simple: before I put a trade on, I force myself to answer one question in plain English… What am I actually betting on? Not rates up or down, but which mechanism I’m betting will dominate.

• Policy timing?

• Terminal expectations?

• Growth momentum?

• Inflation compensation?

• Term premium and supply?

• Vol and flows?

If I can’t name it, I don’t have a trade. I have a vibe…. so lame!

Once I’ve named the driver, I match the instrument to the question. This is the core of the whole piece.

Note I have a website soon be launched, it will contain, models supporting the detection of momentum or mean reversion. STIR curve analysis and fair value models. In addition to plenty of mosaic and proprietary economic measures. Stay tuned for more on a launch date, this will be paired with a 10% price increase.

ETA is approx 2 weeks away.