Gekko

FOR macro players, as they call those who bet on the relative performance of global markets, last year was the year of the “convergence trade.” The convergence trade means making a bet that interest rates in different countries-or between higher- and lower-rated bond issuers here at home-will come closer together.

The convergence trade is a byproduct of happy times for investors. It happens when, little by little, people stop charging a risk premium for their money. Things have been good, the reasoning goes, so things will always be getting better. The neat trick about the convergence trade is that, as every self-important money manager will tell you, “You get paid to wait.” What the miniSoros means is that he has bought a riskier asset such as, say, Italian bonds and has sold short the less risky asset, such as German bonds of the same maturity. Since the interest you earn on the risky asset is greater than the interest you must pay on the less risky asset, you earn income on the spread while you are waiting for your capital gain to come in. You are, indeed, paid to wait.

JD

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John Dizard

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FOR macro players, as they call those who bet on the relative performance of global markets, last year was the year of the “convergence trade.” The convergence trade means making a bet that interest rates in different countries-or between higher- and lower-rated bond issuers here at home-will come closer together.

The convergence trade is a byproduct of happy times for investors. It happens when, little by little, people stop charging a risk premium for their money. Things have been good, the reasoning goes, so things will always be getting better. The neat trick about the convergence trade is that, as every self-important money manager will tell you, “You get paid to wait.” What the miniSoros means is that he has bought a riskier asset such as, say, Italian bonds and has sold short the less risky asset, such as German bonds of the same maturity. Since the interest you earn on the risky asset is greater than the interest you must pay on the less risky asset, you earn income on the spread while you are waiting for your capital gain to come in. You are, indeed, paid to wait.