Adam Parry – The Perils of the Short Stuff

Monday 9th Nov 2020|London

It is the middle of November 1932, and at the Melbourne Cricket Ground (MCG) the visiting Marylebone Cricket Club (MCC) are taking on an Australian XI in a warm up match for the first Ashes test, which is scheduled to commence on December 2 in Sydney.

The match itself was ruined by the rain, but on the second morning of the game, the seeds of what was to come were sown by MCC skipper Bob Wyatt, who was standing in for Douglas Jardine, the tour captain, who had decided to do a bit of fishing. Wyatt placed several of his fielders around the bat of the leg-side and his fast bowlers cramped up the batsmen by bowling at their bodies. Wyatt only persisted with the tactic for a couple of overs.

Jardine, a dour Scot educated at Winchester and Oxford, had devised a plan for the Ashes to negate the Australian hero Don Bradman, who had scored a record 974 runs in England in 1930 at the tender age of 21, including 300 in a single day at Headingley.

As the first Test approached, Bradman was sick and was ruled out the day before the game. Australia  batted first, and Jardine was soon deploying the so-called Bodyline tactics, which reduced the home side to 87 for 4. But Stan McCabe and Vic Richardson decided to hook and be damned and added 129 before Richardson fell to Bill Voce for 49. Richardson later stated that if he had not got out at that time Bodyline would have been dead in the water. Indeed, Jardine was worried, for McCabe’s brilliant 187 seemed to have negated the tactics before Bradman even entered the fray. His mood would have been greatly improved though, by the fact that England won the game by 10 wickets.

The second Test began at the MCG on December 30, and this time Bradman was playing and an infant nation held its breath. Once again Australia batted first, and it was not long before Jardine employed his controversial tactic. This accounted for Australian captain Bill Woodfull and O’Brien for 10 runs apiece. Then the ground rose as Bradman made his way to the crease to face his first ball, to be bowled by Yorkshireman Bill Bowes. The ball was thudded into the track halfway down, Bradman went to hook it, and got a bottom edge and the projectile thudded into his off stump. Bradman was out first ball, and there was total silence around the MCG. He did, however, recover as 1933 dawned and he scored 103 in the second innings as Australia won by 111 runs to level the series.

The third Test, which began in Adelaide on Janauary 13 has gone down in history as one of the most unpleasant ever played in the 143 years of Test match cricket. Jardine won the toss and England batted first and little out of the ordinary occurred as they amassed 341.

Australia’s innings began well enough, and so Jardine turned to Bodyline. The crowd booed as Harold Larwood peppered Woodfull. The mood turned even uglier when Woodfull was hit over the heart. Jardine merely turned to his bowler and said “Well bowled, Harold”.

To try to calm things down the England manager Plum Warner went to speak Woodfull, but was sent away by the Australian captain with the infamous words “I don’t want to see you, Mr Warner. There are two teams out there. One is trying to play cricket, the other is not”.

The next day things got worse. Australia faced a large first innings deficit and tailender Bert Oldfield was playing a stoical innings in support of Bill Ponsford. Having hit Larwood for a couple of fours, Oldfield attempted to hook another bouncer, but only managed to top edge it onto his temple, fracturing his skull. Oldfield staggered away and it appeared that a riot would ensue. Larwood apologised, Jardine did not.

At the end of the fourth day, the Australian Board of Control sent a telegram to the MCC stating that Bodyline was a menace to the best interests of the game and that unless stopped, was likely to upset friendly relations between Australian and England. The MCC replied stating that they deplored the cable. And the situation escalated into a diplomatic incident which was only settled when the Australian PM, Joseph Lyons, met with the Australian Board and told them of the economic impact in Australia if Britain boycotted Australian trade, as had been suggested by London.

And so Jardine continued to bowl Bodyline and won the Ashes 4-1. The lawmakers at Lord’s outlawed the tactic a couple of years later, after which Jardine retired from the game. As far as he was concerned England could bowl half-volleys at Bradman all day long. Which is what they did, with the Don going onto average 99.94 in all test cricket. In the Bodyline series, he averaged a mere 56.

Now the essence of Bodyline was bowling halfway down the wicket and aiming at the batsman’s head. In other words, bowling short. And that brings me on to this week’s diatribe.

In the good old days, one could short most markets with impunity. Short-selling in equity markets was commonplace, and in the bond market it was a necessity.

In order to understand this fully, we need to go through the mechanics of buy and sell bond market transactions.

If for example an investor wishes to buy EUR10m 10yr Bunds, he will have to come up with the money to purchase those bonds. In order to do that, he borrows the cash in what is known as the repo market and uses those bonds as collateral for the loan. For that the repo trader will charge repo interest of the transaction. Should the investor want to sell, the opposite will be true. They will have cash, but will need to borrow the bonds to make timely settlement.

Back through the grey mists of time when interest rates were positive, this created a nice, uniform two-way market and very rich repo traders. After all, it was only fair that they created a bid/offer spread of a few basis points for taking no risk whatsoever, but that is another gripe for a long past time.

But now we sit in a negative rate environment. And that is obviously highly beneficial for those wanting to go long a particular issue. After all, a negative repo rate means that the repo trader has to pay you interest on the money that you are borrowing from him. As Del-Boy would say, kushtie.

The problem comes if you find a bond that is expensive and want to short it. And here we will do a few simple mathematics to illustrate the problem.

For example, say the current 10yr German benchmark, DBR0% 15/08/2030, looks expensive and you want to sell EUR10m of the issue to illustrate that point.

You ask a market-maker for a bid and he quotes you 101.00%. That all sound fair to you and you hit that bid for three day settlement.

The proceeds for the sale are as follows:

Principal of 10,000,000 x 101.00% = EUR10,100,000

Accrued interest = 0 as there is no coupon payment

Therefore the net payable to you is just the principal.

But in order to make settlement, you need to borrow the bonds to deliver to your counterparty.

And in order to do that you need to access the repo market. You go around the repo market, but the best rate on offer is -1%.

A month later, the bond – with no coupon depreciation – has dropped to 100.75% and so you decide to buy them back and book your profit.

Your principal for the purchase is now EUR10,075,000 thus making you a handsome profit of EUR25,000.

But you need to close out your repo trade. The repo interest works out as follows:

EUR10,100,000 X 1% / 365 X 31 = EUR8,600.

So your neat profit had been slashed by 30% thanks to the costs of borrowing the bonds. Nice eh? Who said there was no such thing as a poor repo trader!

This is why bond yields are going to struggle to rise in a negative rate environment. Put simply it is prohibitively expensive to fund short positions. That in turn is a contributory cause of the lack of liquidity that is still all pervasive in the bond markets, as those that are prepared to sit on longs massively outweigh those that want to be short.

In government markets, that effect can be negated by using the futures and options markets. In credit, that is not available and the lack of liquidity in single name CDS also takes being short a particular name out of the game.

And therein lies a problem. Until we get the ability to short the bond markets, they will remain inefficient and unable to function properly. Sad but true. The problem is, one simply cannot envisage a rate environment where normality will return any time soon.

Enough of the doom and gloom and onto this week’s recipe. And it’s game season, so here is a very simple pheasant pie.

Finely chop a leek and a couple of rashers of smoked streaky bacon and fry very gently in a knob of butter. Slice a couple of pheasant breasts into decent sized chunks and once the leeks have softened add to the pan. Cook the pheasant pieces until they have turned opaque but do not brown. Season and add half a bottle of dry cider and some chicken stock to cover and simmer until the pheasant is cooked. Add double cream and chopped tarragon and set aside to cool.

Once cooled, tip into a pie dish and top with puff pastry (chilled, ready rolled is perfect). Brush the top with egg-wash and back in the over at 180C for about 30 minutes. Serve with mash, purple spouting broccoli and any leftover sauce from the pheasant.

Enjoy, and have a great week.

On the Agenda this week:



  • Thursday: CPI; Initial Jobless Claims
  • Friday: PPI; Michigan Sentiment


  • Tuesday: French ILO Unemployment Rate; French Industrial Production; German ZEW Survey.
  • Thursday: German CPI; Area Wide Industrial Production.
  • Friday: French CPI; Spanish CPI; Dutch GDP.


  • Thursday: Industrial Production; Q3 GDP.

Central Banks:


  • Tuesday: Quarles and Brainard.


  • Wednesday: Lagarde speech at the Green Horizon Summit.
  • Thursday: ECB publishes economic bulletin.

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