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Century Financial Consultancy LLC ("Century") does not offer investment advisory or portfolio management services nor guarantees investment returns. We do not accept or make payments in cryptocurrency or digital currency. Our official website is www.century.ae. Beware of fraudulent companies or websites posing as Century. We are not responsible for any losses from using fake websites or entities. Trading in financial markets involves a significant risk of loss which can exceed deposits and may not be suitable for all investors. Before you start, please ensure you fully understand the risks involved.

Friday, February 24, 2023

Pair Trade Analysis - T-Bond Ultra and Euro Buxl

By Century Financial in 'Investment Insights'

Pair Trade Analysis - T-Bond Ultra and Euro Buxl
Pair Trade Analysis -T-Bond Ultra and Euro Buxl

*Trading in financial market carries risk and can result in loss of capital.
*This performance is only observed with historical backtests and not traded by the company.

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions

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Considering the high volatility of commodity products, sufficient client margin should be maintained in the account.
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The holding rates can change, negatively or positively impacting the trade.
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The testing environment has not considered transactions or any other costs.
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Returns may vary if there is any error in executing the trades.
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Past performance is not indicative of and does not guarantee future results. Trading in markets may involve a loss of capital. Please read the complete disclaimer carefully.
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A Pair trade is always taken together and closed together. If one leg is closed and the other is left open, it's no longer a pair strategy and could result in huge losses.
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Any further change in the underlying macros apart from the ones mentioned below may result in significant deviations in the ratio performance and may adversely affect the pair's performance.

The Buxl is a sovereign bond issued by Germany’s federal government to raise proceeds for meeting financial expenditures. Meanwhile, the US Treasury Bond Ultra is a low-risk government debt instrument that is generally risk-free when held until maturity.

US-Germany 30-Year Yield Spread

HI: 0.3306

Data Source: Bloomberg

Date: 15/02/2023

This graph illustrates the spread on the yields between the US 30-year bonds and German 30-year bonds. This spread has narrowed down considerably to a key support level of 143.27 basis points. This spread is expected to widen over time because the ECB is likely to moderate its pace of tightening, subject to new economic forecasts due in March 2023, and to prevent financial instability and recession in the already troubled eurozone economy. Meanwhile, the Fed’s monetary policy needs to remain restrictive for longer considering the hotter-than-expected January CPI print, persistently tight labor market, resilient consumer demand, and heightened retail spending. In practice, this would result in the Euro Buxl outperforming T-Bond Ultra, given the inverse relationship between yields and prices.

Contract Specifications

Contract Ultra 30-Year Treasury Bond
Contract Months March, June, September, December quarterly cycles
Trading Hours (UAE Time)** 03:00 AM – 10:00 PM (Mon), 03:00 AM – 12:00 AM (Tues),
12:00 AM – 02:00 AM and 03:00 AM – 12:00 AM (Wed, Thur, Fri)
 
Contract Euro Buxl (Futures on 24-35 years government bond 4%)
Contract Months March, June, September, December quarterly cycles
Trading Hours (UAE Time)** 04:15 AM – 12:00 AM (Mon), 12:00 AM – 01:00 AM and
04:15 AM – 12:00 AM (Tue- Fri)

Data Source: CMC Markets

** Subject to change

Economic reports drive forecasts for future fed funds rates higher

HI: 0.3306

The Federal Reserve Bank of Cleveland computes the “trimmed mean and median” to eliminate outliers that distort the real picture. The trimmed median has soared to a fresh high above 7%. Meanwhile, although the trimmed mean has retreated from its peak; it remains well above 6%. This has led investors to believe the Fed’s monetary policy stance is unlikely to veer towards a pause or pivot any time soon. The Fed would require substantial and consistent evidence of inflation moderating across all areas of the economy before it considers taking its foot off the pedal. Therefore, with the Fed’s current stance, the T-Bond Ultra is expected to continue underperforming relative to the Euro Buxl.

HI: 0.3306

Data Source: Bloomberg

Date: 15/02/2023

The Atlanta Fed conducts a comparative analysis of flexible inflation relative to sticky inflation. The chart below illustrates the moves over the past three months on an annualized basis. It reveals that sticky inflation remains firmly above 6%, stoking fears that inflation is becoming embedded.

HI: 0.3306

Data Source: Federal Reserve Bank of Atlanta, Bloomberg

Date: 15/02/2023

Risks and Assumptions for Back-tested trading strategies
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The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
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The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Data: 15/02/2023

Arun Leslie John
Chief Market Analyst

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