This is a great time to be trading.  I feel like we could get some volatility, and whenever there is volatility, opportunity is sure to follow.  We also have some key dates in the next two months that I think could present some possible good opportunities:

Sept 16/19: The ED contracts roll – U rolls off and Z becomes the front quarterly contract.  This hasn’t given us much of a kicker in recent years.  However, the Sept options we have had will roll off and I will be looking at some new versions of the trades.  ED17-21 spread has generally been the highest year spread on the curve.  I’m not sure if this is: (1) the convexity guys (traders who trade bond convexity vs EDs), (2) people wanting to be long the golds, (3) options-related, or (4) a combination of the three.  I think we could pick up a fractional amount being relatively short this spread in a structure going into the roll.  In particular, I think this makes sense in the context of Trade F32 (see Trade Update section).

Sept 21: Fed meeting.  Last week, I highlighted why I thought the market pricing for the Sept meeting was “fair.”  Since then, we got a second weak ISM report (services, to go with manufacturing), the stock and bond markets could be jittery and libor-FF is a touch wider.  This makes the hurdle for a Sept hike a little higher on the margin.  I may go over the scenarios more next weekend.  We still have Retail Sales and CPI with a data-dependent Fed.

One of the things I am looking forward to doing on a Fed no-move is backing up the truck on cheap libor compression trades.  I couldn’t do this in size before because buying calls on EDX as a pure libor narrowing play could be lighting money on fire if the Fed hikes.  Buying calls could be okay as a “Fed does nothing” play.  After the uncertainty of the Fed meeting goes away, we can play for libor narrowing more aggressively.

Oct 14: Money rules go into effect.  See above.  I already have a trade in mind to play for this (after the Sept FOMC meeting), and as we get closer to the date, we may see other (better) opportunities.  Also, if you are going to buy put structures, I like buying then in V (Oct serials or midcurves).  And if you are buying call structures, I like buying X or Z (Nov or Dec).  This way, you get a little more juice on libor staying high before October 14 and it drifting back down some time later this year.

Nov 2: Fed meeting.  It’s only 6 weeks after the Sept meeting.  Nothing will most likely occur, but the markets will start getting more and more nervous about a hike with the current Fed rhetoric.  I think trying to buy the Nov meeting on a dip makes sense on a no-move in September.  I had thought we could get a dip in the Nov and Dec meeting pricing if the Fed were to hike in Sept.  However, now I’m not so sure about Nov, since it is already very low.  There isn’t that much priced in there, and there may still be the lottery effect, as unlikely as hikes in consecutive meetings are.

Nov 8: US election.  It seems like both “candidates” want to spend even more money on useless crap (walls, free college, estate tax discounts, etc).  This could be negative for the long end of the curve, and on the margin this could cause rates to go higher.  The more interesting thing is whether the new president will have a Congress that will be supportive of all the new spending plans.  If the President and Congress are deadlocked, some things probably won’t get done.  That could be long-end bullish, on the margin.  No one really talks about it, but the huge increase in debt during Obama’s administration was essentially fiscal stimulus.  So if the long end could rally in recent years despite all that Obama fiscal stimulus, perhaps politics are overrated as a rates driver.  But we could get some volatility nonetheless, and that could present some good opportunities.