Hedging mortgage interest rate yourself?

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  1. #1

    Hedging mortgage interest rate yourself?

    hey guys i'm considering buying a property in HK soon but i'm really paranoid that u can't fix u're rates like u can in oz and i'm really worried that the rates will go up especially since HK currency is pegged to the US... so i'm racking my brains trying to figure if there is some way i can hedge itmyself...

    i'm thinking of shorting a US treasury with the notional size of the bill the same as the size of my mortgage. hence if rates go up the bond should decrease by the same amount as the excess interest i have to pay.... do u think it would work? i'm thinking of shorting the bonds using cfds that u can get at www.igmarkets.com.au

    of course i'm assuming the peg for the USD to the HKD will remain for some time.

    can someone pick a hole in what i'm doing and why it won't work? thx.


  2. #2

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    is there a treasury bond that u can short ?

    remember, treasury bond pays interest. if you are going to short the bond, u have to pay the interest to the buyer.

    if you are talking about shorting bond futures.. ya maybe that might work. but u'd better have enough cash to top up the margins if the market swing against u..

    and finally, from banking perspective, the change in rates is not going to be as sensitive as your full hedges.


  3. #3

    sorry thats right i meant bond futures.... when u say bond futures are sensitive is it because say if i buy a sep07 future its market value will change daily based on sentiment on which way the interest rates will move?

    how often do the bond future prices expire the same as when u bought them i.e. if interest rate view doesn't change much during the time of the bond future it should expire with the same value correct?

    (i don't know much about bonds so hence the simple questions )


  4. #4

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    i am not too sure fully what the bond future implies.
    it cld be just the price of the nearest 10 year maturity bond. the impact is that u have the daily MTM, and if interest rate goes against you in the futures you'd need to top up the losses daily.. even if eventually you 'make' back the losses. if you can't afford to top it up then the contract will be closed out at a loss to you.


  5. #5

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    As far as I know there are not such sophisticated products in the HK retail market. They may be in the wholesale side, but thats not where you are, is it?

    The best avenue, if you are looking medium to long term, is to short the property market buy using an interest only product. The repayments are lower because no capital repayments and property in HK, because of its shortage is always a growth product in the new or near new areas.

    So the product would have to be transferable. Buy your way through the market over time. Buying to let is the preferred instrument for interest only as your tenant pays all the charges !!

    If your working for a company, its not strictly legal, but buying a house as a company ( personal ) and then renting it back to yourself from the allowance your employer gives you, is the way that you can live in it and have someone else pay your investment charges.

    When I say not strictly legal, there have been cases where government employees have done similar and got done for it. You would need to look at your own employers rules in this matter.


  6. #6

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    huh. that is not a sophisticated product. its just not commonly used by retail. the 10 year treasury futures. but again, i do not have time to check exactly what it entails. 8-P