In the previous article, we talked about the idea of the “miracle of lowest correlations” by including U.S. treasury bonds in the portfolio of defensive sectors. In this article, we address the fundamental reasons why U.S. treasury bonds work so well in conjunction with indexes and why corporate bonds are not a true alternative to them.
brief information about the dynamics of interest rates
When the economy is doing well and, as a result, securities indexes are also growing, the central bank raises the interest rate on issued loans to make more money. This causes a chain reaction of rising interest rates for all current issues of debt instruments, such as bonds or bank deposits. This means that earlier issues of debt instruments at a lower interest rate than now become less attractive and their prices fall.
When the economy is doing badly and as a result paper indexes fall, the central bank lowers the interest rate to prevent a wave of bankruptcies associated with the excessive debt burden of companies in crisis when they are unable to pay their debts at previous interest rates. This means that previous issues of debt instruments at a higher interest rate than now become more attractive and their prices rise.
Continue reading “Negative correlation in U.S. treasury bonds”
The Miracle of Lowest Correlations in Action
To put it simply, I use a wide array of uncorrelated premiums. Each premium individually is as simple and reliable as possible, based on solid fundamental analysis. But unfortunately, it does not generate a large percentage of profitability.
Examples of trading premiums:
Return +9.1% CAGR, max drawdown 24.6%
I’d like to give you a more detailed history of my trading over the last 3 years with illustrations. Detailed profitability statistics can be found here.
There have been 3 major mistakes in a total of several dozen trades. They are all quite simple and very easy to avoid with enough experience. But I didn’t have that experience at the time : )
Jewelry Season
I used to not understand how it was possible to trade precious metals at all, except as part of a passive securities portfolio as an alternative allocation. But after studying it a bit, it turns out that there is one of the easiest trades in this market.
As we all know, price is determined by the balance of supply and demand. And in the case of precious metals, there is a huge imbalance in demand. This is because of the uneven distribution of holidays throughout the year. On holidays, people give each other gifts and jewelry flies off the shelves of jewelry stores. The jewelry business has a distinct seasonality and must protect the price of its production commodity supply by buying futures for precious metals.
Us Driving Seasonality
The easiest trade in gasoline and energy carriers is generally based on seasonality from early February through May and is traded long.
Seasonality is based on the annual growth and decline cycle of the average car mileage in the United States. In other words, the average car mileage increases during the spring and summer months, and accordingly, gasoline consumption increases from winter to summer.