You’ve heard me talk about Kong (the EDZ8-Z9 buyer) for most of the year.  I’m not sure if I’ve seen too many of the Planet of the Apes movies, but I seem to be seeing signs of large market participants all over the place.

  • I was telling some people that I thought I was strange that tens broke the key 3.05% rate and we didn’t take off.  It will be interesting to see what happens the next week or two before the next wave of key data. There are clearly large players in the market that have the size to move rates.  If you could move the markets enough, and wanted to get long fixed income, you might as well break a key resistance line (for yields), get everyone to sell, and then buy. Maybe my imagination is just getting the better of me.  It’s possible this is just a pause caused by a lot of foreign carry buying before we continue higher in yields.
  • This past week, we had a massive move in EDM8 on a few days of ~1bp lower Libor fixings. When EDM8 moves 4bps in response to a 1.25bp change in the cash fixing, that smells a little fishy.  I had a feeling that the markets were short the EDM8 98.625 straddle, and people who were large enough and knew the positioning probably helped “nudge” the stops along. Because if you can move a contract a bp or two knowing that the markets are short gamma, why wouldn’t you?
  • I was looking at a chart of two year yields, and I am uncertain how such a straight line move from Q4 of last year to January of this year could be a coincidence.  As a comparison, take a look at how much choppier the ten year yield has been. While we have had continued constructive data, I’m not sure this is a “natural” move.  A gorilla could build a gigantic position, buying on dips (in yield) and selling on pops.  And if they get caught a little offsides, they can buy some tens (or some other point further out the curve) for directional/duration balance if they also believed in the flattener story.  And before you know it, they’ve made their year.
  • On a related note, I’m a little unclear as to how FFN8 has moved in such a consistent pattern the past few months.  In that time, we had a slightly dovish FOMC, slightly softer inflation, a pullout of the Iran deal, many bad Trump headlines, EM troubles, potential trade tariff issues, a spike in EDM8 and it’s STILL gone on it’s downward march.  I’m not saying the Fed isn’t going to hike in June… just that you would have thought we got more of a daily trading range. The offer seems strangely deep for something I think is mostly “fully” priced.
  • There seem to be large algos that absorb any market oscillations.  There have been large market-moving events which have occurred , but we move to a level and seem to just sit there with much less movement than one would expect. I am still in the observation phase of this increasingly larger development.
  • And there is Kong – the EDZ8-Z9 buyer I’ve mentioned numerous times in the CA.  The OI in EDZ9 has declined to “only” 1.9 million, from some profit-taking. But he is still out there, raking it in.

The combination of having these large players in the market, AND having algos that seem to absorb most of the curve noise has made for a difficult environment to trade in.  The larger players cause an overmove against value and trigger stops, while the algos make it more difficult to scalp/job for value.  But that doesn’t mean there aren’t things we can think about doing in the near-term…