The Macro View

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 30 Year Downtrend Line

I was listening to Bill Gross on Friday and he mentioned that we will be hitting the 30 year downtrend line in ten year Treasuries between 2.4 and 2.45% (currently 2.37%).  Gundlach made fun of Gross’s line-drawing skills last year.  My line drawing skills are just as bad.  I have no idea what people look at – cash, futures, constant maturity, daily/weekly/monthly, high/close, etc.  It’s like asking the proper way to stick the pins on a voodoo doll, when you don’t believe in voodoo.  I look at it occasionally only because others in the market look at it.  If the [...]

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 [...]

Legging Lessons

Since some of you may be new to ED trading, I may occasionally do a “Trade Basics” segment.  There was an interesting trade that went through on Friday, and I thought I would discuss it.  Almost 25K EDU7-EDV7 spreads traded.  This is a crazy amount to have traded, considering the open interest on EDV7 is only 103K contracts.  I’m assuming this is probably some kind of unwind.  There appears to be an equally unusually large volume on this spread trade on August 2, and since EDU7 rolls off Monday, it seems reasonable to conclude that this was an unwind of [...]

Short End Shenanigans

Since the macro rates picture has been hard to decipher, I think this is a good time to look at the micro.  There are a lot of interesting things going on in the very short end of the curve right now: I. An ease is more likely than a hike. As I mentioned earlier in the week, FFV7 and FFX7 are starting to price in an ease.  FFX7 should settle at 98.843 on a typical non-event month.  Not only did 98.845 trade, it went bid late Friday and some 98.85s traded.  That’s a little crazy, considering we’ve had no new [...]

The Long Term Treasury Rate and Fed Funds Target

Last week, Kaplan suggested that his long term neutral FF rate was closer to 2.5% than 3%.  I’m going to assume that his dot is going to be at 2.625% later this month.  This got me to thinking about the relationship between the Fed’s mean long run Fed Funds rate projection from the SEP[1] and the 30 year Treasury rate.  The Fed actually sets the target Fed Funds Effective rate (“FFER”), and there is generally a tight relationship between the FFER and Treasury rates.  I know people who think of longer run Treasury rates as a strip of Fed Funds [...]

Cute Fact – Years Ending in 7

There’s a cute statistic going around that in the second half of years ending in 7, the equity markets have had poor returns: 1987 (Black Monday), 1997 (Asian Crisis), and the 2007 (Financial Crisis).  Whaddaya know?  2017 also ends in a “7.”  And we just happen to be in the second half of the year. There are a few candidates for catalysts: any of several possible Trumpidity Crises, a North Korean Crisis, an auto subprime Crisis, the brick and mortar collapse crisis, the divided nation Crisis, the Gulf of Mexico Swallowed My Glasses Crisis… the list of possibilities are long.  [...]

The Micro View

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 [...]

ED-FF is Steep

I mentioned in client emails that I prefer taking Fed hiking views in FFs, and I wanted to explain a little more fully.  One of the things I have been doing more work on this year is looking at opportunities on the ED-FF curve.  We had a nice trade when we bought EDH8-U8 spread vs FFJ8-V8 spread at 1 and 0.5 and recently got out at 3bps. The ED1-ED5 vs FF spread curve has been wide relative to the past few months.  It’s possible it can widen more, with the recent Fed tapering which may cause spreads to widen as [...]

BONUS: Trade Thoughts

For the rest of this month, I'll reprint the Trade Thoughts section of the CA Newsletter.  There are seven parts to the Newsletter: (1) My take on the events of the previous week, (2) A summary of where I see value on the curve, (3) The Weekly Essay, which you can access on the web site or receive in the CA Digest, (4) Trade Thoughts, where I discuss a particular area related to trading (Fed pricing, ED-FF spread curve, interesting technicals, trade basics, or where I see some value in a trade), (5) The Flip Trade Update, where I discuss trades for jobbers, (6) The [...]

Fed Dot Surprises

I know the markets have been ignoring the Fed’s dots for some time now.  But as I always say, as the meetings get nearer, the Fed dots get more accurate.  For example, the day before a meeting, if you were to do this exercise and 12 of 16 members wanted a hike… they will be hiking.  I wanted to point out some of the more interesting features from the dots. The Core summary. I typically like taking out the high 6 and low 2 dots - just to weed out the riff-raff and see what the center of the group [...]

The Tapering Fed Meeting

One of the things about the “gradual and communicative” Fed is that they pretty much tell us most of the important things we need to know well in advance.  No one said anything about a hike (even the hawks) so the odds of a hike at the September meeting is basically “zero.”  They have also communicated for the past two meetings that tapering is coming, so the odds of the Fed not announcing the taper at this next meeting is also basically “zero.”  I suppose there could be some question about when tapering would start.  My “pick a date out [...]

Cute Chart – QE “Caused” Rates to Rise

A cute chart that has been going around is this idea that QE caused rates to INCREASE.  Therefore, tapering should cause rates to DECREASE.  <crickets>  As absurd as this sounded, I had to whip out the chart to take a look. Sure enough, after QE (and Operation Twist, denoted as “OT”), rates did increase soon thereafter.  But that would be an oversimplification.  To me, the main takeaway from the chart is that the markets are forward-looking and anticipatory – sometimes overly so. QE1 and the Taper Tantrum were two events that may have caught the markets off-guard. That is why [...]

CA Digest Email

Subscribe to the FREE Curve Advisor Digest

See All Macro View
See All Micro View