Best Trading Strategy Of The Week - Buying US Treasuries On Dips

govttrader's picture

As previously discussed on the govttrader blog, the selloff from the 1st half of December has come and gone.  While that does not mean that large long bets have been placed on a US Treasury rally, it does mean that a large short position in US Treasuries has been covered.  It is for this reason that buying dips in US Treasuries has been the safest trade for the last week.  Any US Treasury trader knows that the time to buy is when the last seller has stopped selling.  Well, for the time being, that appears to be now. 

For the past week, every day has seen the following pattern
1)  A center of value develops, defining a simple bell curve
2)  The bottom of that bell curve has held every single time. 
3)  Buying that dip to the bottom of the bell curve, and getting flat on a pop above the center of value has been the easiest daytrade i've seen in a long time (7-10 ticks in ZN each time)

The kicker is that we expect this pattern to continue until the end of the year.  Of course we know that there are no guarantees in trading, and this is just something that i've identified as a high probability setup, not a guarantee.  However, if a good trading strategy is making a large number of bets where the probability of winning from trading a particular pattern is higher than some reasonable threshold, then this is an example of a good trading strategy.  Does this mean that I want to own US Treasuries in my retirement account?  Hells to the no.  Like everybody else on zerohedge, i think there is a massive wall of inflation coming down the pike, and long dated US Treasuries will implode at some point in the future.  I just don't think we are there yet, and my landlord prefers i pay my rent in need to play in the market to make some.

more later on the blog and twitter.

govttrader out...

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The Joker's picture

Just buy the fucking dip!

Cult of Criminality's picture

"Thanks for the tip"

Same here.

CrashisOptimistic's picture

Hard to lose money on the only asset Bernanke has specifically said he is buying with nearly infinite money.

This is a matter that has bothered me for some time.  What price?  When he buys MBS, he buys them from bank balance sheets that are not marked to market.  He overpays purposely as part of the ongoing bailout of those MBS.

Ditto Treasuries.  The reason he buys, he says, is to lower rates.  You don't lower rates by driving a hard bargain on price.  So he bids up.

That's the sort of asset I want to be in -- the one where the infinite source of all money is bidding it up.

beachdude's picture

TBT, or maybe even TMV.

magne13's picture

Govtrader is correct once again, those are bleed trades and their inherent design is to rebalance daily and slowly over time take all of your investment.  Once again, the novice trader does not have a chance or the average investor will come to the casino and eventually leave everything and then some.  This is how the system is designed.  Create products for the believers in hopes they bite.  This is why the US big ponzi is slowly imploding,  there simply are no players left except for the central banks to keep the ponzi going, too bad Bernie did not have a Central bank as a buyer of last resort.

govttrader's picture

I know those ETF's well...and i don't understand why anybody would be stupid enough to hold a position in them (long or short).  They rebalance their portfolio every day...which is a money bleeding operation...every single their transaction costs are much higher than using futures.  If you don't want the extreme leverage that futures provide, then just have more money in your account to use as your "cushion."  Not trying to be abrasive here...just trying to educate.  Real US Treasury traders trade cash treasuries (the actual bonds), or treasury futures...the ETF's are for suckers.

dumpster's picture

nickle flip your way to a yacht

govttrader's picture

Luckily, the US Treasury market provides traders with up to 70x leverage (if you trade in the futures market).  So, making 0.25% (thats 8 ZN ticks) in one day * 70 = 17.5% real return.  If you can do that 4 times per month...thats 70% return in 1 month.  Do that 12 times a year and you're not talking about nickle flips anymore.

Clowns on Acid's picture

Yo govie T - "  If you can do that 4 times per month" - what happens the other 4 times a month when you get stop lossed out ?

magne13's picture

Clowns, stop losses are guaranteed losses and traders like me and most certainly govttrader know that stop losses do not work, in fact they guarantee  you lost on the position, or gave up gains considering trailing stop.  Govttraders point is that markets provide opportunity to those smart enough to find them, stop losses are not actual orders for above average traders, but rather more of personal guides to exits and entries.  Real traders use spread hedges in order to stay in their positions and decrease their chance of taking a loss as the swap into correlation trades.  For instance if I want to get short stocks I can do a lot of other trades than simply selling eminis, I can buy bonds, I can buy tens, i can put on a curve flattener, it is the current financial market conditions that separate real traders from novices and I am glad a lot of bond traders have left, leaves more opportunity for me to exploit irrational moves.

Clowns on Acid's picture

magne - thanks for the trader 101 lesson. I have been trading for 20 years and my point to govie t was that his startegy of gleanig 8 pips a day four times a month, and translating into fabulous profits is an old theme.

Now you want to talk correlations, curve trades /flateners, etc...same thing, its an old theme. Algos make it "easier" to execute the high probabiltiy trades based on pre programmed relationships (curve / correlations), but don't talk about "buying Bonds on dips for 8 pips" for 4 times a month and reporting fabulous returns, and then expecting experienced traders to take you seriously.

"The "current" market conditions that separate "real" traders from novices" ? Puhleeze ! I have heard all of this before, and indeed at one time when I was "on the desk" I believed it for a while. Hope you do well, but never, never spout shite like you and govie t have done here. If it is working for you, congrats, keep your trap shut and make sure that you don't get bit in the ass. Things / conditions can change quickly, and will do so when you least expect it.

Craft, Courage, and Speed. 

GAAPpreNixon's picture

Leverage isn't luck!

Leverage is increased risk in EXPONENTIAL PROPORTION to the increase in leverage!

Leverage, without the Geithners and Bernankes to nursemaid broker dealer welfare queens, would have bankrupted the "too big to jail" leaches long ago!


Jack Sheet's picture

If your leveraged bets are so good you wouldn' t need to publish them here. You must be rolling in money.

govttrader's picture

I just recently moved over from the market-making side to prop trading.  Hopefully, in a year, you will be correct.  Writing on zerohedge is a way for me to be accountable and not do stupid things.

Jack Sheet's picture

OK fair enough. Then I really do wish you luck.

Edit: where does it end then - under 1% on the 10 yr? Negative yield? Even then, what use is the profit on the bond price when the USD is finally jettisoned globally?

Quinvarius's picture

Have you considered the reason you made that move to prop as a possible red flag to going anywhere near bonds?  I have enough exposure to bond operations to know business is drying up and traders are being forced out.  The traders say the Fed is buying up everything and there is no supply for them to deal.  The truth is there is no market other than the Fed.  There is endless demand for anything at the correct price.  This isn't it.  If the bond market is in fact a real market, or ever will be a real market again, buying anything is ignoring the market signals.  When the Fed is gone, I'll be in there shorting these at even half the current price.  Good luck to you. 

NotApplicable's picture

"When the Fed is gone..."

Isn't that like getting un-pregnant?

They cannot, and thus will not exit this game, EVAR! They will play it until it all blows up, then cobble together the pieces in whatever global currency facade they plan on replacing it with.

Quinvarius's picture

Which is why I continue to not short that market...yet.

Orly's picture

Please don't get irritated with the Mad Max crowd.  It is enough to get one frustrated and not want to write any more.

We (the other crowd...) duly appreciate it.

Happy New Year!


tango's picture

Unfortunately I agree.   The idea of switching from stocks to cash is better replaced ith stocks to treasuries.  Until the idiots wake up, treasuries are preferred since every MSM commentator (and most brokers) consider them safe havens.   The trick is getting out before they start the inevitable race to the bottom.

Freddie's picture

10-year treasuries are at $132!  What could go wrong?  Worthless paper being sold at 32% over par.

govttrader's picture

Normally, i'm not inclined to be a teacher to remedial students...but..this one is for free.  10yr treasury futures are NOT the exact same thing as 10yr treasuries (the name is simply a market convention).  In fact, their duration is closer to a 7yr note than a 10yr note.  The current price for the 10yr treasury is 99-08 (yield = 1.708).  There is a formula to convert the price of a treasury future into the price of the deliverable treasury security...but that would probably go over your head.  Please go to the CME website and read up on treasury futures.

Do you not understand what "duration" means?  Then perhaps you should spend some time at as well.

Oh snap he didn't!!!

carambar's picture

if y ou were such a smart ass as you pretend you wouldnt waste your time on ZH.

Clowns on Acid's picture

govie t - Freddie didn't ask you about duration, he asked you "what could go wrong"....

You are indeed NOT the first Gov't  trader to do the suimpleton math of leverage  "8 ticks a day" and then show fabulous, potential upside. Good luck to ya, but methinks you will find out a bit different. 

GAAPpreNixon's picture

I disagree. The "idiots" will never "wake up". That's why they are called idiots. Whether there is a method to their madness is another subject but the most efffective trading strategy right now is SILVER PLAYS!

ALSO RIMM, GMCR and GLW are looking very good.

This is not financial advice. Buy at your own risk.