Thread by @HeardFloor

Hedging is a key skill that every trader needs to learn.

The ins and out of hedging are not widely talked about on #fintwit.

Here are a few insights into what products I like to use for hedging my fixed-income portfolio 👇

1. First I need to ask myself what type of bonds I need to hedge? EUR denominated or USD denominated?

In this case I will talk about USD debt:

- Investment grade
- High Yield
- Emerging Markets
- AT1/Hybrid/Perpetuals

I use different products for each type of bonds.

Investment grade bonds

We have two options here:

-Rates hedging by using the US Treasuries futures - $ZB_F $ZF_F $TN_F $UB_F or similar products
-Same sector ETF hedging - $LQD or the $IBIG futures which are a proxy of $LQD.

High Yield bonds

We don't have many options here:

- Using a same sector ETF like $HYG or $JNK, but one should be careful, lower rated High Yield bonds should not be hedged with $HYG as they have idiosyncratic risk. Appropriate to hedge BB+,BB or BB- bonds
- IBHY futures

Emerging Markets

- If rated BBB+ or above could be rates hedged, at least for a short-period of time - Depending on the maturity, you can use $ZF_F $TN_F $UB_F, etc.
- $EMB - Most popular EM $ debt ETF. I use it again to hedge higher rated EM bonds , anything from BBB and above.

AT1/Perpetuals

Not appropriate to rates hedge them with futures as they are not as responsive as Investment Grade bonds.

Most popular ETFs to hedge with:
- $FPE - Mix of Yankee bank USD and US perps
- $VRP - USD perpetuals only.

Let me know if you find this type of insights useful. I will do another thread next Tuesday covering the ins and outs of hedging my IG bond exposure with futures and why I prefer doing so to hedging with cash treasury bonds.