Questions on a bulletproof macro strategy

I am going to lay out a two-part, sure-thing investment strategy and I hope that someone might be able to point out why it wouldn’t work and/or why I am a moron:

  • Sell short a government bond that has negative yield
  • Purchase the currency in which the bond is denominated

My rationale is that a bond with negative yield is at its ceiling value and only has room to go down in value. Would you also be collecting interest payments on the bond from the person you borrowed it from? Lastly, why wouldn’t you just short all bonds that are trading at a premium? They have to converge on their maturity value, correct?

And the second part of the strategy is to take advantage of interest rate parity. The negative interest rate will have to rise eventually and as an interest rate rises, the yields become more attractive thus foreign investors buy the domestic currency to access the increasing yields. But one point of confusion on the overall interest rate parity model: why does relative attractiveness of foreign rates matter? Lets say country X has a -1.00% interest rate and it increases to 0.00%… why would anybody need to invest in that if there is still a country with comparatively higher interest rates? I mean to say that country X’s interest rates would need to become the highest on the globe before anybody would feel compelled to invest in it. Thus, wouldn’t it be a step function of currency valuation increase once Country X’s interest rate becomes higher?

From a practical view, to short a bond, you’d have to trade it on margin, and the margin rate will almost certainly be more than what you could earn from the strategy.

If you are agnostic towards the particular bond, “short bond” basically means to take out a loan. Again, the loan spread would probably make positive carry impossible.

Finally, if you were a large institution like a government, such that you have virtually no credit risk, yes, you could potentially borrow EUR 100 million and repay a smaller amount later, due to negative interest rates. However, you’d have to deposit that money somewhere, and you would likely be earning a negative interest rate in that account too.

Not sure how to read your second question. All those interest rates are determined by the market to begin with.

Got it… I figured that it was impossible in practice

just get a big bed. hide money under mattress

…and make sure it is RMB! :grin:

Leverage man lever that thing like LTCM did haha

LTCM, except that it was more like STCM with 2 Nobel Laureates and 24 PhDs in their payroll they managed to lose 99% even after muti-billion dollar bailout by wall street banks. This should tell people that maybe maybe all these “analysts” and “fund managers” and “quants” don’t have a clue about the market…But nope…after one year of failing LTCM, the founders opened up brand new hedge fund with same investors using same strategy…only to go bust again a few years later LOL…But all good because by then the founders are super rich living in their McMansions in CT and Purchase NY

My point: nothing is impossible in practice in finance because everyone is clueless…If you have the right looks, resume, and networks and you are a fox (as in fox vs hedgehog) you can have crazy strats and yet, money will flow in - just look at VIX funds.

the big mattress strategy is for countries with negative yielding rates.

Isn’t that ‘hot’ money though?