The Macro View

Know Your Enemy

“Know Your Enemy”                                                                                                                                                - Sun Tzu & Green Day On Friday, we got a 2bp flattening in EDH8-H0.  As mentioned in a previous CA, there is a tendency for the curve to flatten a few days going into the Fed meeting.  Note that I didn’t mention EDZ8-Z0, which was unchanged on Friday.  The price action felt differently on the Zs last week, and may last going into this Fed meeting.  Unlike prior weeks, the Z algo seems to be offering the Z contracts more often than not.  Whether this is just a lightening-up before the FOMC (before further buying) remains to [...]

ETF WTF

As I was watching equities make yet new highs last week despite lower stimulus prospects, increased Presidential turmoil, and weaker data (albeit still constructive), I thought about the ETF phenomenon.  I had mentioned ETFs casually in previous CAs as a source of equity support.  Consider all the 401(k)s, retirement funds, and personal investments that are tied up in passively managed funds.  A lot of that money is just automatically invested at regular intervals.  Workers generally only make allocation changes a “few” times a year.  Since the flow of funds into the ETFs are very regular, there are probably funds that [...]

Fed vs the Markets

Tens are back near the recent low yields, and Z8-Z0 spread is back near the recent lows.  This is a little surprising, but I suppose the bulls got an assist from Trumpidity.  All other things being equal (ex-Trump), I would have thought we sold off going into the Fed minutes, that may discuss tapering of the balance sheet.  Instead, with the announcement this weekend that Comey would testify after Memorial Day, the markets are going to be more focused on the headlines and less on the Fed. Let’s for a moment ignore Trump/Comey/Russia, take a step back and look at [...]

ED-FF Spread

[From time to time, I will post trade-related commentary from the web site.  The EDM7-FF spread collapsed the following week and this trade thought has resulted in one profitable trade and the second order effect of the ED-FF curve steepening has given us a an initial profit on a second trade.] One of the more interesting developments this year has been how the ED-FF spread has collapsed.  Take for example EDM7 vs FF.  It was over 35bps at one point this year, and it settled over 15bps lower on Friday.  I suppose considering we’ve had a yield-grab rally, it makes [...]

A Caveman’s View of Frexit

I am not going to pretend to be any type of French political expert.  But sometimes, not being so immersed can give you a different perspective.  I put on my CArock, the Unfrozen Caveman Curve Advisor, hat on to give you some non-standard takes: The market reaction should be interesting on Sunday.  I discuss a few trade thoughts in the next section.According to the betting markets, the following are the odds of the various Final Two pairings.[1] Yes – I realize the bookies have had a terrible 12 months with political odds.  But, just because something is 10 to 1 [...]

Potpourri II

I’ve been a bit punch-drunk for most of this year by all the headline bombs we have been a little behind the markets on.  There are a lot of things we have no competitive advantage trying to guess (since others in the markets have some insider information or just better leading information sources).  I wasn’t sure why the Fed was in such a rush to hike in March, when they are gradual and data-dependent and there was no pressing data.  I wasn’t sure why the Fed is in a rush to normalize the balance sheet by “later this year”, when [...]

Potpourri I

[Not one of my more inspired posts, but this goes to show you why directional trading is not always the best approach.] I have a lot of mixed thoughts about rates right now.  The best course of action was to jot them all down, take a step back and evaluate them. BULLISH THOUGHTS Later Non-Quarterly meetings. “Later this year” does not just mean Dec.  It could mean Nov (and Sept is a remote possibility).  This means that the Nov non-quarterly meeting year is not looking great for a hike, if you are in Dudley’s camp that the Fed takes a [...]

Widen Your Trading Horizons

One of my pet peeves about trading is how the general trading population can only think in terms of “up or down.”  As a result, people tend to under-appreciate market commentary that is not related to correctly predicting/forecasting/guessing “up or down.”  I wanted to discuss the various forms of analysis that you can make use of: Correct directional analysis. This is unquestionably useful when correct, but very few people are right significantly more than about 55-60% of the time.  Very few.  If you take a longer time horizon, that number could be higher.  But it would be unrealistic to think [...]

Six Pillars Update

That article I wrote was finally published.[1]  The hard copy should be out some time next week.  I’m supposed to be getting a distributable pdf copy at some point that I will forward to you.  The important takeaway from the article is to understand when the regime is about to change.  “Understand the current regime we are in relative to the historical data and understand what regimes we are likely to progress towards.”  We are a few steps from getting to a regime change now… Remember the “Six Pillars of Long Rates” [2] article from last quarter?  We are starting [...]

Calendar Thoughts

I saw an interesting interview last week with Chris Cole (Artemis Capital).  He gave an example of the Cold War, where we had peace (low volatility) however any number of things could have happened that could have triggered a nuclear disaster.  Since he is a vol trader, he was referring to the current environment of high risk but low volatility. I suppose I had been thinking something similar, in that I have been saying the tail risks to both sides have been quite large.  It’s somewhat unusual to think that we can get a huge move and not have a [...]

The Micro View

The Collapse of EDM7-FF Spread

The big story on the curve last week was the collapse of the ED-FF spread.  I had been saying for a while now (as recently as the last CA) that EDM7-FF seemed strangely high to the rest of the ED-FF curve.  That finally capitulated last week, with EDM7 rallying 7.5bps, while FFN7 only rallied 1.5bps.  I updated the chart from the Trade Thoughts section last week to show the dramatic changes in the ED-FF spreads in the past week.  You can see that EDM7-FF declined 6.3bps on the week.  Now EDM7-FF looks a little too low on the curve, but [...]

ED-FF Spread

[From time to time, I will post trade-related commentary from the web site.  The EDM7-FF spread collapsed the following week and this trade thought has resulted in one profitable trade and the second order effect of the ED-FF curve steepening has given us a an initial profit on a second trade.] One of the more interesting developments this year has been how the ED-FF spread has collapsed.  Take for example EDM7 vs FF.  It was over 35bps at one point this year, and it settled over 15bps lower on Friday.  I suppose considering we’ve had a yield-grab rally, it makes [...]

Timing of Pricing in Hikes

I thought it was interesting that the June meeting was about 80% priced with over 5 weeks to go.  I think the Fed is hiking in June as much as the next guy.  But that’s a lot of time to go – we could get unfavorable news, or the data could turn south, or we could get some market instability, etc.  Since a number of the previous hikes were “well telegraphed”, I wanted to see when the markets priced in the “likely” hike. The chart on above shows the number of weekdays until the respective FOMC meetings (x axis) and [...]

Z8-Z0 Flattening

I sent out an email a week or two ago that showed Z8-Z0 locally peaking a few days before the FOMC meeting, and sure enough, we flattened strong on Friday afternoon.  Part of it may have been month-end.  The question then becomes, do we take out the low at 42?  There has been a strong flattening bias heading into the FOMC meetings, and soon thereafter. However, given the current shape of the curve, I would argue that this could be like swimming upstream.  Now I’m not saying we couldn’t flatten much more.  As you can see from the above chart, [...]

Dudley More

Dudley is the guy who said last year something to the effect that the Fed’s projections have an extremely wide standard error, and that people would be surprised at how wide it is.  Speaking of which, we should be getting the error bands around the SEPs at the June meeting.  So it’s interesting that he was as specific as he was in his interview, considering we are data-dependent.  I found a lot of interesting nuggets from his short interview: He is still a dove. He said “The consensus among many people is that the neutral FF rate adjusted for inflation [...]

A Suspicious Pattern

I’m trying to decide if last week’s post-FOMC rally was (1) a “reading comprehension fail” by the markets, (2) unbelievably aggressive positioning/expectations going in, (3) or something else.  “Something else” always makes me a little nervous.                                                                                                  - CA March 26, 2016 It is becoming clear that there is “something else” going on in the interest rate markets.  We have seen an increase in long positioning in the JPM client survey.  The top three candidates for the additional bullishness are: (1) pricing in of less fiscal stimulus than expected, (2) Article 50 next week, (3) French election positioning, or (4) [...]

Fed Funds Update

Now that we’ve had some Fed shenanigans and the odds on various meetings have changed, we should do an analysis of the Fed probabilities for the next 15 months.  There are a number of notable changes since the last time we looked at this. The non-quarterly meetings got killed. I mentioned two weeks ago that the Fed may be reluctant to hike at a non-quarterly meeting, based on how much they were in a rush to hike in March.  So this can be understandable.  Remember less than three months ago, when our FFX friend jacked up the non-quarterly meeting probabilities?  [...]

Fed Takeaways

When things don’t go as planned, I think it’s always good to take a step back and reflect.  Was the March hike something that could have been expected?  Maybe.  You just needed to think CPI would have lit as large a fire as it did under the FOMC.  I thought they would have needed some PCE corroboration.  But I suppose PCE inflation was firm month over month, even though it was in-line.  We learned a number of things from the events of the past week: We have no competitive advantage trying to guess what will happen at the next FOMC [...]

A Post-Tarullo FOMC

There are some important implications of Tarullo leaving early: Trump gets to pick THREE Fed Governors, ONE Fed Chair (next Feb) and ONE Vice Chair (next June). Yellen and Fischer may not choose to stay after their terms as Chair and Vice Chair are over.  They could stay if they wished since their Board terms are not over until 2024 and 2020 respectively.  I would guess they choose to leave.  They are both pretty old, and the last thing you need in your golden years is to live in fear of being harassed via Twitter.  If they chose to leave, [...]

Surge in Non-Quarterly FOMC Meetings

We had a noticeable shift about how the quarterly vs non-quarterly meetings are priced.  I mentioned in an email last week that there was a large increase in open interest in FFX7.  Since then, there has been a larger increase in OI.  Open interest in FFX7 increased over 250% the past week, from 10.0K to 35.4K contacts.  The other FF contracts had no notable OI change (other than FFF8 which has no meetings in it).  I was speculating this was some kind of “September FOMC” deferral trade, since it is unusual for someone to want to take a large position [...]

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