The Macro View

High Yields and Equities

I ran across this chart yesterday (a retweeet from 13D Research and Bloomberg), and I thought it was interesting because we had some unusual price action Friday.  Normally, when equities drop almost 1%, you would expect fixed income to rally noticeably (especially after the volatility-driven market nervousness earlier in the year).  But the long end of fixed income actually sold off noticeably!  I suppose the longer end of the yield curve did (over)flatten the prior few months, so perhaps we were due for a correction. Since the volatility scare a couple of months back, it’s felt like fixed income has [...]

Trade Tariffs Potpourri

The markets are difficult to trade directionally with the markets whipping around on trade tariff headlines.  We have no significant competitive advantage in trying to guess the outcome.  There are a lot of people out there with more information than we have – people who actually speak to the inner circles of Trump and Xi.  And even if we knew what the final outcome was going to be, it’s probably going to be a long process and we have no idea if the next major trade headline will move the markets the wrong way before moving the right way. The [...]

Q2 Preview

We could see extremely interesting price action this quarter.  There are a number of catalysts we had been anticipating in Q2.  Let’s look for opportunities in the next week or two in the following areas: Equities.  We had been looking forward to this next set of earnings for months now.  We should see the effects of the lower corporate tax rate and investment incentives.  We will also get the announcements on what will happen with the repatriated earnings.  I would think one of the reasons people have liked buying equities on dips is because of the anticipation of these pieces [...]

Equity Regime Change?

I’m not one of those people constantly calling for an equity correction.  Last year, when everyone was on the “October crash” bandwagon, I said while this was possible, that seemed liked a crowded trade and that the positive EV (expected value) was probably to the upside.  Most “analysts” will just look at something simple like a P/E ratio and not consider the other things going around them… like the corporate tax reductions, individual tax reductions, repatriation, a new infrastructure spending plan, the popularity of short vol strategies, and global central bank QE.  If you weigh all of the above, it [...]

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 [...]

The Micro View

Longer Term Fed Funds Are Back!

For many years post-recession, the Fed Funds curve was dead.  Then as whispers of Fed policy normalization came around, the Fed Funds within 6 months started to come alive.  Then the Fed Funds within one year were trading actively.  I was surprised to see that the volumes even past one year are finally showing signs of life.  On the right are the open interests in Fed Funds futures from this time the past three years.  There are a number of things to note: The open interest has steadily increased the past few years. The FFF9 OI of 309K is fairly [...]

The Fed’s Overshoot

One of my former colleagues at JPM was a rocket scientist – literally.  We once discussed how for some corrective system models, you can have a situation where you overshoot before eventually settling to the equilibrium.  That conversation was what I thought about when I saw the Fed’s dots last week. The way the Fed models tend to work is that there is a bit of an overshoot on rates, because Fed policy generally takes a number of months to take effect.  So if the Fed had the foresight of a bat, they would keep hiking as they saw inflation [...]

Fed Meeting Thoughts

There are so many wacky things going on with Eurodollar futures, from libor blowing out to Kong buying EDZ8-Z9 in unprecedented sizes, that it’s hard to get a good handle on what is going on with short end interest rates just from looking at the EDs.  I haven’t seen the ED curve this messed up since the Libor crisis a decade ago.  But this time around, the economy is perfectly fine!  EDs are insane!!! Fortunately, we have Fed Funds, which gives us a cleaner look.  But even that has a little noise in it from the markets pricing in a [...]

Normalization Timing

The two big stories this year are: (1) Libor increasing and (2) Kong buying EDZ8-Z9.  These two factors have had a negative impact on the back of the whites.  Kong has also had a negative impact on the steepness of the curve past EDZ9.  Kong has had an indirect effect on the curve past EDZ0, since there appears to also be some chunky EDZ9-Z0 buying from time to time, in response to Kong’s EDZ8-Z9 buying.  The question is, when do these two factors turn? There’s some probability the correction could happen at any day.  We have had some false normalization [...]

White (Pack) Normalization

How things can change in a week!  A number of the things I mentioned last week are starting to normalize.  Apparently, I don’t live in Bizzaro World after all! The libor fixing stabilized. It’s only been a few days, but libor looks to be stable around here.  As per the chart I showed last week in the Trade Thoughts section, I do think we could get more EDM-FF narrowing as the year goes on, than is currently priced by EDM8-FF.  This makes owning EDM8-based call structures attractive, as both a libor play and a crisis play.  The other thing we [...]

White (Pack) Noise

There are a bunch of strange things going on in the front of the curve (next 12 months).  It’s been a really long time since I’ve seen so many unusual cross-currents go through at the same time: The libor fixing is going nuts. EDH8 vs FF has widened about 21bps since January 23.  Part of that is just us breaking the multi-decade tens downtrend line – you would expect some widening of ED-FF spreads on a selloff.  And part of this is EDH8-FF going from being about 5bps narrower than libor-FF to 6bps wider than libor-FF.  The popular narrative is [...]

Trading Around a Monster

It has been many years since I’ve seen flows this aggressive and wacky on the US rates curve.  It appears King Kong (the EDZ8-Z9 buyer) likes to try and pound square pegs into round holes.  The curve has wanted to flatten, but he insists on keeping EDZ8Z9 steep.  I thought he was done after the stock market correction, as the OI in EDZ9 declined noticeably.  But he came back even stronger.  This was very unexpected, since seeing how the greens led a crisis rally (thanks to him keeping the curve steep) should have made him realize that EDZ8Z9 was going [...]

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.  [...]

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