The Macro View

King Kong Lives

Long time readers will know this story, but when I went through the (JPM) Chase two-week trading simulation, I just crushed it.  I had been playing strategy games and video games all my life.  So making markets and buying and selling many trades in fast markets was relatively simple.  One trading unit was in foreign exchange.  I had no experience with FX whatsoever.  But I had no reason to think I couldn’t do as well in this simulation, as I had in the past simulations.  When I sat down, the default trade size was set to “1”, which seemed very [...]

A Caveman’s View of Bitcoin

I’m not claiming to be any kind of Bitcoin expert.  I don’t know much… after all, I’ve been trapped in a block of ice all these years[1].  In particular, I have no idea how Bitcoin (or equivalent) can be considered a “currency.” When you have a fixed asset where someone keeps taking a fractional transaction cost, eventually, the users end up with next to nothing and the processors end up with most of the asset. A long time ago, my father and I were sitting around the fire cooking our mammoth meat, and I described to him how poker at [...]

A Sheep’s View of Fiscal Stimulus Effects

I (re)heard a good trading quote the other day… “Ever wonder why fund managers can't beat the S&P 500? 'Cause they're sheep -- and the sheep get slaughtered.”  The line is by Gordon Gekko, from the movie Wall Street.  I didn’t realize when I first saw the movie decades ago that sheep are followers.  I just thought Gekko was saying other fund managers were meek.  And now you know why I was not a literature major (or a farmer).  In any event, it’s perfectly fine to be a sheep – you just need to know when to get out.  It [...]

Many Traders have Never Seen…

Have you ever heard that phrase “Many traders have never seen___”?  For example: Many traders have never seen a real vol spike. You’ve probably heard ad nauseum about how short vol (VIX) sellers will get crushed one day. Many traders have never seen a real equity correction. For almost eight years, buying on dips has been a good strategy. Many traders have never seen buying fixed income against the bond (or tens) yield downtrend line in the US not work. There are many old traders who’ve made a career on having the 30+ year downtrend line in the bonds hold. [...]

Bungee Cord Drivers: Retirement and Inflation Part 1

I’ve talked a lot about the bungee cord in the past few months, that is holding the US longer end from taking off.  But the bungee is more than just the ECB and BOJ QE.  Implicit in the QE policies (aside from manipulating the FX in those economies’ favor, eh hem) are the inflation and demographic structural forces that cause the QE to be implemented in the first place.  So to figure out when the bungee cord will break could amount to getting a better idea of when we could see some signs of inflation or a change in the [...]

Too Much Energy in the Bungee Cord

The “common sense” narrative is that the economic data has been good and we just got tax reform.  A $1.5trillion deficit means that much more debt that needs to be issued and a boost to the economy.  3.0% tens, here we go!  I mean the Fed’s long run FF projection is 2.75%, and most of them don’t assume any kind of substantial fiscal stimulus.  Add some increased term premium on the curve and we could be off to the races.  This would make complete sense if the US was not so linked to the policies of other major economies.  But [...]

Current Events

It was a quiet data week, but we had a very interesting news week, that had some interesting implications for the curve.  It seemed for most of the year that everyone was expecting oil to go back down.  That has not materialized.  Higher oil prices are generally inflationary (even for core inflation).  Depending on whether the Fed is seen as being vigilant or patient, the front or back of the curve could lead a selloff.  It is unclear how much escalation we could see in the Middle East and how long this could last.  You would think that oil could [...]

The Big Data Week

I’m getting the feeling that if we don’t break the downtrend line next week, it could be at least another month (until the next PCE and Employment report) before we test it again.  We have a TON of data and news next week, and potentially a ton of good trading opportunities. Powell, Taylor and Yellen. We should find out who the new Fed Chair will be, before Trump leaves for his Asia trip at the end of the week.  There were rumors on Friday that Powell is going to get the nod.  Powell should be 80+% priced into the markets, [...]

Fundamentals vs Downtrend Line

Now that the ten year yield is back near the recent highs, I’m a little uncertain as to how far this goes.  If it wasn’t for the downtrend that everyone seems to be looking at, I would probably say we could sell off a lot more.  As previously mentioned, it’s just a question of when the downtrend breaks – not if it breaks.  But when something has held this long, people have made careers just being long fixed income, and net central bank buying is still positive, it’s going to take a strong confluence of factors.  I thought I would [...]

Where’s Inflation?

I haven’t looked at the inflation breakdown in a while, so I thought I would dust off my old economics degree and take a look.  I’m really no economist.  But as Richard Thaler showed, the most important thing is some common sense.  I had written for a while that you should not expect too much goods inflation (price discovery, technology, free trade, demographics, etc).  But I was curious if there were any new developments, since inflation seems to consistently disappoint. Below is a table of the inflation breakdown of the categories I thought were interesting.  Rather than reproduce the entire [...]

The Micro View

Large Volumes, Part II

I generally don’t like writing about the same topic on consecutive weeks, but in this case, I have to make an exception.  Consider how much the Open Interest has increased in the Z contracts since the end of 2017 (highlighted in yellow), since last week’s post.  And these do not include Friday’s trading!  [The OI data is one day delayed.] On Friday, 141K EDZ8-Z9 year spread and 128K EDH9-H0 year spread traded.  I’m guessing both of these flows are new positions.  These are some large volumes – especially in the case of a non-Z year spread like EDH9-H0.  Consider that [...]

Large Volumes, Part I

I’m a big believer in adjusting to what the markets give you.  One of the ways we may get some relative value trading opportunities is when we see large flows that distort the curve.  The premise would be that these positions would need to be unwound eventually – either from taking profit or stopping out.  Even if they do not, we may be able to find a structure that is superior for the same view as the large flow. Since some of the volumes have been eye-opening, I wanted to look at the changes in ED and FF contracts since [...]

Fed Hikes

For the New Year, let’s go back to the basics and see what the markets are pricing in for the FOMC in 2018.  The most common refrain I hear is “three hikes in 2018.”  I can see that.  There appears to be more “smoothing” on the Fed Fund meeting curve than I remember.  What are the odds that the March, June, Sept and Dec Fed meetings all fall on a straight line?  I’m not sure the meetings should be this orderly in a potentially volatile year.  I mentioned last week how straight the one year fly curve was last week.  [...]

Straddle Selling

Almost two months ago, I was watching some large players sell the EDZ7 98.50 straddle for about 6-7.  At the time, libor-FF was very stable, but it was not a “sure thing” that the Fed was going to hike in Dec (maybe around 80% priced).  I didn’t have a strong view on the level of the straddle.  It seemed like it was very fractionally positive EV at the time.  But I prefer finding “zero cost” ways of owning the tails, rather than being short volatility in this environment. Well, lo and behold, we got a funding “event” and that EDZ7 [...]

Three Fresh Prespectives on the FOMC

The US Federal Reserve is expected to raise their policy interest rate 25 basis points this week.  The Fed will also increase the pace of its balance sheet reinvestment tapering, by increasing the unreinvested amount from $10 billion to $20 billion.  We also get a new set of dot plots, which could show a change of direction in Fed policy, but will most likely remain the same.  Despite all the potential activity that is going on, most analysts would consider this a relatively “ho-hum” meeting.  The markets agree, based on the declining interest rate volatility.  Amid this complacency, I thought [...]

Curve Flattening is Not Signaling a Recession

I’ve been saying for weeks now why the curve was probably going to flatten.  I discussed how the other central bank policies could act like a bungee cord, holding the longer end US rates down.  Last week, we got Draghi comments that inflation can not be self-sustaining without stimulus.  And we got lower-than-expected Japanese GDP.  So despite the stronger US data, the longer end rallied for the week, partly because the bungee cord shows no signs of fraying. As analysts come on TV to discuss the flattening of the yield curve, the interpretation I think is incorrect in the current [...]

Fed Pricing 171105

There seems to be two large flows going on right now in the front of the curve.  I had previously mentioned our EDZ8-Z9 friend, who appears to be on the wrong side of EDZ8-Z0 flattening.   But the other development showing up on the radar is a large short in EDM8.  In the past two weeks, EDM8 OI has increased 56K, while the rest of the whites decreased 205K.  From the curve move, we can see that EDM8 position was a short.  The EDZ7-M8-Z8 fly increased 4.5bps in the past week.  That is a little strange when the Fed has signaled [...]

Lower Inflation vs Stronger Growth

Last week I said for the bullish scenario that Z8Z0 could get to the low (28.5) and we may be able to rally 10bps.  Well, that’s what happened.  We had several pieces of bullish news: (1) the lower CPI on Friday, (2) The Fed being concerned with “non-transitory” low inflation from the minutes, (3) the strong bond auction despite potentially strong economic data the following day, (4) Trump cutting back on healthcare payments (higher costs to consumers and potentially slowing the economy), (5) Trump decertifying the Iran deal, (6) a non-hawkish ECB taper plan, (7) no progress on tax reform [...]

BONUS: Simple Yield Curve Scenarios

Now that we have Data Week over with, the rest of the month should have less noise than average.  However we have the following considerations for the rest of the month: North Korea. As mentioned previously, there is a 1.5 week window between China’s Golden Week, and the National Congress.  What a “coincidence” that we got some chatter for early next week!  I’m not sure we get anything, but the market is probably very short fixed income.  The last JPM survey was extremely short, and we sold off more last week.  While I think we did get some short covering [...]

BONUS: “Free” Straddle

From time to time, I'll post an occasional trade.  You'll need a reasonable cost structure to take advantage of this opportunity. On Friday I sent out the following trade: I saw EDZ7 98.625 call trade 1.5 and that seemed really cheap.  The premise of the trade is to get a "zero cost" straddle.  In fact, according to my numbers, I think you GET PAID for owning this straddle.  This would be to buy 100 EDZ7 98.625 call vs Sell 12 FFF8. I'll do the full write-up this weekend.  But basically, the EDZ7 call traded 10K times at 1.5.  FFF8 should [...]

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