I Didn’t Get the Job, But I Did Have a Damn Good Trading Idea That Worked
(Originally posted on LinkedIn - 23/10/26. Copying over to blog)
Last month, I got to a final round after many arduous stages for a junior seat at a rates desk. Although several of the traders liked my trade idea, I didn’t get the job. Mind you, if they stole the idea, they would have made a lot of money 👀
Short the spread in yields between mid to long-term Australian and U.S. bonds
In other words, the difference between yields will compress. For context, Australia has slightly higher mid to long-term yields than the U.S.
Expressed by:
Selling 10 year US bond futures and buying 10 year AUS bond futures. (Futures quoted as price not yield).
Futures provide a liquid and easy way to express the trade in varying sizes without having to own the underlying bond.
10 year chosen as further along the curve is too sticky (not liquid enough) especially for AUS bonds.
Ensure trade size matches up in terms of current exchange rate so basis risk is minimised.
In other words, the risk of holding too much or too little in contracts on one side of the trade due to differences in currency.
Trade hypothesis (what I wrote at the time, around 22/9):
U.S. not incentivised enough to tackle inflation head on and hike rates strongly because of desire to keep hot economy ticking over (mainly driven by AI capex).
Strong hiking may be risky in an overinflated and fragile market, in particular with current AI industry concerns*, and it would also not be a beneficial move politically with mid-terms on the horizon.
A growing U.S. debt pile is already a concern for investors (hence recently growing yields), and from the government’s perspective if they can play a balancing act between not over hiking whilst hiking in small amounts to be seen as ‘addressing the issue’, they can allow inflation + growth to stay higher than interest rates – making their debt pile relatively smaller.
Australia more likely to tackle inflation head on with significant hikes because their inflation is sticky and a lot more inflationary pressures down the pipeline –e.g. the current energy shock/ large importation dependency for refined products, continued slowdown in exports to China.
In recent RBA discussions, the sentiment that Australia will deal with the problem of sticky inflation in the immediate seems likely.
If I am correct, this should mean risk premium in AUS longer dated bonds is reduced – since the back end is , essentially , a reflection of the front end + inflation risk premium.
This combined with a far lower fiscal deficit will incentivise buying for mid to longer-term bonds and Australian yields less likely to grow as much/as quickly as U.S. yields – even if they are currently higher.
Therefore, U.S. yields will grow quicker/larger than Australian yields, and the spread between the two could narrow over the coming months.
*see previous blog post where some of these concerns are elaborated on.
** Respective bond yields in more detail, including an interactive chart where you can see 10-year yields one month ago and now:
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