FGBM vs FGBL

Introduction

I love macroeconomics, this is why I have some preference for the interest rate derivatives. If we check the main European fixed income futures, we need to have a look at the Eurex exchange. One of my favourites futures is the FGBL (bund future). However, it’s difficult to trade for individuals with small accounts because it’s easy to get stopped out. If the 10-year bund future is to volatile for you, I would recommend having a look at the FGBM (5-year bond future known as bobl) It has the same tick value as the FGBL and it´s less volatile. And if you are starting, I would definitely go for the FGBS (2 German bond future called Schatz).

Can we trade these products only looking at the macroeconomic indicators?

Well, I believe that you can, it depends on the size of your account, the trade size, the strategy (risk management, money management) …

If you have a big balance, you can trade according to the macroeconomic data as far as you trade a small size and you look for the medium term or long term. The problem here is that you need to create your own indicator that shows you the health of the economy. In the current environment, I find this challenging because some assets are influenced by the central banks' decisions and political uncertainty (it’s very difficult to measure these factors and include them in a model). I highly recommend to set up a stop if you are going to trade like this.

    FXandFixedIncomeTrading logo, own elaboration

What are the alternatives of trading trends?

If you don’t like to trade trends you should be looking for market neutral strategies.  This kind of strategies are used by hedge funds. It basically consists of hedging. It seeks to avoid the market risk. The way to apply this strategy with futures is with intra-product spreads or inter-product spreads.

FGBM-FGBL Spread

I’ve been looking for a trading strategy like this for a while. I decided to spread the FGBM and the FGBL at the ratio of 3 to 1. I have checked only the charts but they look good to me.

     FGBM-FGBL Dec18, daily, source: TradingView

As you can see it has been moving in range since the middle of June. The range of the spread has been 160 ticks (234.60 and 233) while the bund range has been 291 ticks. I wouldn’t recommend holding overnight positions because these futures can open with a gap.

Conclusion

Sometimes is worth to consider market neutral strategies. Their main advantages are: there are multiple of entries, they are less risky than the outrights, you can consider as an alternative strategy if there is a lot of uncertainty in the market.  Obviously, the ratio 3 to 1 used in the example is random. I could have chosen a different one. Ideally, we should compare the DV01 of these futures and get the ratio from there. On the other hand, you can consider the different volatilities of the products involved or the correlation to get the spread ratio. Also, you should think about the trading commisions and the margins because it’s not the same to trade a 1 to 1 spread than 100 to 200. Having in mind all of these factors is not easy and requires a lot of work. Sadly, after testing the system or the strategy you can be disappointed with the results. Don´t give up and keep trying to improve it.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved