Our studies have shown a negative correlation existing between stocks and bonds. This suggests pairs trading opportunities in long/long or short/short strategies.
However, the pairs trades should be rather small, as the correlation is not as strong as it could be. For example, the movement to the downside in stocks has been muted relative to that of yields in US Treasuries.
Besides trading bonds as a component of a pairs trade, we can also utilize the active movements and increasing IVR in the bond market and trade bonds on their own by trading strangles, iron condors and vertical/ratio spreads.
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