Curve Advisor Bulletin
Trade
I like taking some profit on any trades that involved shorting FFN9 (FFN9 vs short other FF spreads and FFJ9 3mo fly). With a potential China deal as early as late May, it's hard to see the Fed do anything aggressive unless the wheels really fall off the economy. But taking some profit off ahead of Retail Sales and making room to add can't be terrible. FFF0 3mo fly traded some 1s (after going 2 bid yesterday), so scale out of some to reload. My favorite bullish trade is still to sell FFG0-J0… with noticeable offering of EDZ9-Z0 spread and EDZ9 12mo fly, I’m not sure we can go too wrong in owning a cheap Q1 2020 ease (unless you think the Fed can hike).
Market
It appears that economic growth is decent, but not great. A big positive could be a China trade deal. However, the markets seem to be interpreting the stronger China data yesterday as possibly a weaker deal. So we are seeing both equities and rates lower. We are in the earnings blackout, so we may get a little more equity noise than usual. In the meantime, I like using rallies to play for short-term eases to be priced out (probably in the form of put structures to limit risk). Retail Sales will be interesting in setting the tone for the next week.
Market
It's been a long time since I read Market Wizards. But this is one of those timeless books you can pick something up from every time you read it. I listened to this old interview with Jack Schwager (episode 754) yesterday and though it was informative enough to share: https://www.trendfollowing.com/podcast/
Market
There was a 50K decline in OI in EDZ0 through EDH2 (longs unwinding). This probably added to the recent steepening pressure. We see steepening again today. One of the common narratives I hear from people who like steepeners is that they feel that the curve should steepen on both a rally and a selloff. On a selloff, the main causes would be: (1) a Fed tolerating more inflation, (2) QT, and (3) fiscal deficits. This makes some sense in a vacuum. However, (1) if we had inflation, I would think the 20+bp eases on the curve would be taken out before we start worrying about Fed inaction, (2) the Fed narrative can change quickly, (3) other central banks are looking at increasing QE, and (4) US fixed income yields are higher than many other developed countries. I don’t have a strong view either way. However, the fact that whites-reds spread seems reluctant to take out more eases makes me think the Recessioners will be around, and that playing for roll in the eases makes sense.

However, next year is an election year and there could be some chatter that the Fed may want to not seem political. I don’t think the election-related dates will affect the Fed if a move seems clear. In fact, I don’t think the election dates matter much at all. But we will have chatter from the analysts, so we may want to be alert when taking positions around or before FOMC meetings around key dates:
• Democratic National Convention: July 13-16
• Republican National Convention: August 24-27
• Election Day: November 3
But if you believe the hype, you may want to play for Fed moves comfortably before or after the above election dates. So if you want to play for eases rolling down, this means selling something like FFG0-J0 @ -2 (March seems early enough) or flatteners after the elections. The markets may not be thinking about this for at least 6 months, but keep it in the back of your mind.
Market
FFJ9 traded down to 97.585 last night, and is currently 97.5875 offered. It seems the marketmakers think that we could print 2.42 today, for at least half the rest of the month. FFK9 is 97.59 offered. Considering there probably should be maybe a quarter bp of a May ease priced in, the marketmakers also think that the FFER could print 2.42 for half of May as well.

This, along with the lower Libor print today, is a double whammy for Libor-FF. Curiously, the ED markets seem to be mostly ignoring the low Libor print today. We seem to have high funding rates al around (repo, SOFR, possibly FFER), so it’ll be interesting if this is temporary. With EDM9-FF being priced to rise 1.5bps with lower Libor(!), I like taking some profit on that EDK9 vs EDM8 97.375 straddle trade.
Market
I was thinking about the China data tonight, and if they were going to fudge some numbers, the ones right before trade talks are about to end would be some of the high priority ones. The last thing you want is to have Trump think you are weak at the tail end of trade negotiations. I'm wondering if this was one of the reasons for the longer end (general) sell-off today. The market reaction after the data will tell us to which extent good data was priced in.
Trade
The FF curve for 2018 seems a little more reasonable now. FFN9-X9 vs 2xFFQ9-V9 is close to 1. I would take profit around here, as it is unlikely to go negative any time soon. I still think FFV9-X9 is still too high, but if the markets want to give us a cheap look at 50+bps of gain on an October ease, then so be it. As we now see, with the June hike looking less likely, I think people who are long FFN9-Q9 are going to really nervous about a China deal not coming though.

The part of the FF curve that looks a little strange is 2019. I have no idea why the Q1 2019 hike is being priced so strangely. If you look at FFG0-J0 spread, that is a solid -2.5 bid, even though that is a quarterly meeting, and in my mind, if the Fed were going to be on an easing cycle, that has to be around the peak area where the Fed would ease. So if you want a quarterly meeting to play for an ease, consider selling FFG0-J0. I mean the FFX9-F0 (Dec meeting) and FFK0-N0 (June meeting) are each about 1.5-2bps lower. If you want a relative value trade, you can buy either FFX9-F0 or FFK0-N0 against FFG0-J0. If you prefer, you can do a non-quarterly vs quarterly trade, by buying FFF0-G0 and selling FFG0-J0 @ 0. You may even be able to leg -1s. If you don’t want to leg, you can sell the FFF0 3mo fly (2s have traded out, and there is probably an iceberged bid). You may be able to leg 2.5s.
Market
I thought this podcast was a good review of the repo blow-out last year, Treasury demand and reserves. https://www.bloomberg.com/news/audio/2019-04-12/why-foreign-investors-aren-t-buying-as-much-u-s-debt-podcast
Trade
The two best trades are selling EDZ9 3mo fly @ -1.5 (or -2) and selling EDZ0 6mo single of double fly. I am thinking If reds-greens steepens more, we can try to buy some 0EN9 thru 0EZ9 97.625 puts vs 2EU9 thru 2EZ9 97.625 puts (buying reds midcurve vs greens midcurve puts).
Market
EDZ9 OI increased 19K on Friday. The past few days, it seems like there is a large EDZ9-Z0 seller (maybe Kong/EDZ9 put condor buyer). But the strange thing I’m noticing is this flattening seems to be occurring while reds-greens pack spread is trying to steepnen. This is the reason that EDZ0 6mo fly is grinding higher. While I think this a great trade, it’s a little unclear how to call a top in this when there are apparently two large forces in opposite directions, so leave room to add.

FFV9 OI increased 12K. I think this is probably new selling, from people who don’t think the Fed will be easing soon (through Q3). We have also seen FFN9 sell off to more reasonable levels. There are only 1.5bps of ease priced into Q2 now. This is fairly gross, as we did not get a chance to put on the trade I mentioned over the weekend. But there will be other trades.

I want to focus the next few days on how Libor and FFER fixes now that the Tax Deadline is here, and the Treasury should have plenty of cash. Libor fell by 1.3bps today, and while the FFER was unchanged at 2.41, the 75th percentile has been back down to 2.41 the past two fixings.
Trade
It’s odd that FFN9 is pricing in 2.5+bps of an ease on the current curve, ASSUMING FFER stays at 2.41. This assumption is not completely clear, but you can always look at FFK9-N9 if you want to remove some short term FFER fixing risk. In any event, when looking at the EDN9 97.50 call for 2.75bps (3 settle), I would MUCH prefer to own the calls, than be long FFN9. I think selling the FFN9 (or buying FFK9-N9) vs buying EDN9 calls (or maybe even some EDM9 calls) makes a lot of sense. You get a “free” look at an ease in the July, Sept and 50% of the Nov meetings in the EDN9 calls (since the underlying is EDU9). Even if the Fed eases in June, MANY more eases will be priced into the post-FFN9 EDU9 meetings. And even if you don’t think the Fed will ease, you may make money a little on the calls after the June Fed meeting. You may make money on BOTH sides of the trade if the Fed doesn’t ease in June but goes to an easing bias (for example, if the China deal gets pushed back and fizzles). You also have a chance to make money if Libor-FF collapses. The main risk would be if ED-FF widens on an ease. However, the past few rallies did not really show any material credit risk. I think if we sell off some more (and/or vol gets crushed in the next two weeks of no data) and FFN9 remains sticky, we could get the EDN9 97.50 calls for the price of FFN9 decay. But let's first make sure the FFER stays stable at 2.41 after Tax Day before doing noticeable size.
Market
Yellen confirmed my claim that the new nominees to the FOMC will be put in the "corner." And after listening to Moore on Bloomberg last week, I'm convinced his diarrhea of the mouth will have zero weight on the FOMC. “If the arguments that people make, and the evidence they bring to bear are not well-grounded and thoughtful, over time people sitting around that table will challenge their colleagues,” former Fed Chair Janet Yellen said in Houston on Wednesday. “A couple of individuals will find it difficult, who come with a political view, to have a great deal of influence.”
Trade
Tax Day is Monday. The Treasury won’t be so broke anymore. There has been a pattern of Libor-FF narrowing after April 15, and going into the summer. As a result, I think we should unwind most/all of that short EDK9 straddle vs long EDM9 97.375 put trade. It’s up half a bp. You can keep it if you like having the EDM9 97.375 put for 0.5, or if you like having a bearish position on EDM9. However, I would prefer to unwind and move on to something else.

CHART:
Trade
Speaking of unwinds, the FFN9 3mo fly is 1 offered. I like taking profit here. The FFJ9 3mo fly has not moved much, but I do think that could go higher, as the June ease gets taken out. The belly-led selloff is causing the EDZ0 flies to go higher. I definitely like scaling in, as the markets should calm down. I do think the “end of cycle” people will regroup and come back, so if we keep selling off this way, look at the rolldown trades in the reds (flies and spreads).
Market
It looks like the combination of stronger EU IP data and Chinese exports is making the Recessioners rethink their global recession thesis. So we are seeing selling led by the back reds and probably an unwind of (bull) steepeners. We are slightly below multi-week lows in tens, so the technical should be interesting today.
Trade
Trade
* 1:28 PM
The Murphy’s Law of Trading had us sell off today, and I had nothing new to add in terms of additional bearish trades. I still hate myself for unwinding flatteners in the reds. But the next best thing are the 6mo roll trades starting in the back of the reds. I had previously mentioned EDZ0 6mo fly and EDZ0 6mo vs EDZ1 6mo double fly. For some reason, these are trading back at attractive levels. I think there is a large market participant wanting to do something on the other side. Another attractive alternative is the EDZ0 6mo double fly (some 1-1.5s traded). The reason is that the EDZ9 turn is starting to get highly priced - especially vs FFs. The EDZ0 6mo single and double fly have very little turn priced in. I think what is going on is that Kong (the put condor buyer?) is keeping the EDZ9 offered. There has been a sneaky seller of EDZ9-Z0 spread all day (19K traded). I’m not sure when they will be done, but at some point, you would think the turn gets priced back in and we roll down the curve.

CHART:
Market
I was thinking about the environment post-Draghi. My assistant summarized the search for the next ECB President in enclosed document and it was interesting that all the front-runners are considered “hawkish.” I think starting next month, we could start hearing more chatter about a hawk replacing the uber-dove Draghi. An ease is currently priced, AND we have a dragged-out Brexit, AND Trump is going to beat down the EU on trade, AND the EU would have to overcome demographics to not be Japan. But I do think at some point, when the data recovers, the markets will price in more of a hike than they would have under Draghi. Especially in a post-China trade deal world. I don’t see anything great now, but let’s keep this thought on the radar for when we get more favorable levels.

DOCUMENT: ECB President.pdf
Market
We had a little excitement in FFs this morning, as 43K FFK9 traded (and 32K FFM9). The past three fixings, the 75th percentile was 2.42 (25th percentile was still 2.40), so I suspect some marketmakers thought there was enough of a chance of printing 2.42 that it was worth selling the front FFs. FFJ9 is still 97.59 offered for size (24K traded). This may be related to tax-funding. Let’s see what happens next week, and we can see in tomorrow’s OI if this was long covering or a new short.
Trade
There was nothing I found interesting in the minutes. My main focus now is to look for trades that make money on a no-move. I like the idea of owning EDZ9 puts, since they make money on Libor-FF widening, but I don’t want to pay a lot of premium. I also like the idea of owning put structures on the midcurves, but the markets seem to have crushed vol further out. So now I’m wondering if it isn’t better just to buy puts to play for a hike. The Fed sounded like they could have one hike in the barrel if the economy improves enough. Maybe

It was interesting how both EDM0 and EDM1 both traded to strikes at the high (97.75 and 97.875). I wonder if that was some kind of option-related play/push. It’ll be interesting to see how we trade around the strike going into the Friday expiration. The Fed was not as concerned as the markets thought. Let’s look for a break higher to play for a shorter-term “no move” play.
Market
I’ll take a closer look at the minutes later tonight, but the markets shouldn’t have expected anything other than “the Fed is data dependent”. The longer end rallied in sympathy to the ECB, and CPI gave no reason to sell off. Apparently, they changed the methodology on clothing prices, which is why apparel fell. But I don’t know enough about the details to say whether this is a valid reason. But what I do know is that the Fed is in a Goldilocks environment and Mnuchin says trade is progressing, so continuing to play for a short term “no move” makes sense (with crisis protection), vs rolldown eases further out. I think when we get closer to a trade deal, we can think about some more put trades.
Market
Libor fixed a whopping 2.2bps higher. It’s curious that EDJ9-FF is pricing in over a 1.6bps narrowing in the next three fixings. We have seen Libor whip around, but that seems like a high over/under. You can consider selling some EDJ9 if you are bearish, or sell EDJ9 vs long FF if you are not. You can also consider selling EDK9 vs FF, as EDK9-FF is pricing in 2.2bps of narrowing in Libor-FF and is the narrowest point on the ED-FF curve. I think what is being priced into the markets is the Treasury not having to issue after Tax Day. I am of the opinion that the Treasury intake will be much less than expected over time, so I like Libor-FF wideners further out the curve. You can consider buying ED 97.375 puts further out the curve if you are bearish and think the eases will be taken out.
Trade
I'm not sure how negatively equities will react to the EU tariff news, during the equity buyback black out. As a result, I like covering the EDU0-U1 and EDU0-H1 flatteners. We made a little, but I want to see the markets settle down before having on ED flatteners. EDU0-U1 is 5 offer. You can also convert the EDU0-H1 to a EDU0 6mo fly by buying 50% as many EDU0-U1 if EDU0-H1 won't trade bid side.
Trade
CHART of FFJ9 3m fly:
Trade
CHART of FFN9 3m fly:
Trade
The Recessioners have evacuated from the Q3 ease, and have regrouped around the Q4 ease. There are now only 5bps of ease priced into Q3, while there are 3.2bps in Q2 and 8bps in Q4 (6+ bps for the Dec meeting, which is 50% larger than any other meeting). Q2 looks too high relative to Q3. As I have been saying for some time, the odds of a Q2 ease are fairly small, with one of two Q2 Fed meetings coming up in 3 weeks (where the Fed is unlikely to do anything). I mean GDPNow has Q3 GDP at 2.3%. That is sizzling (relative to Fed projections)! But there is plenty of time for the Fed to ease in Q3 (not my core view).

FFN9 through FFV9 OI declined 11K yesterday. But the OI decline was mostly around FFN9, and less in FFV9. We are seeing some signs of the FFV9 selling slow. This brings up a few related Flip plays:
1) Buy FFJ9 3mo fly (or sell 2x FFN9 vs Buy FFV9) @ 2 (hasn’t traded, but 2.25s have). This could get severely negative if the Fed were to hike in Q3. If you think the Fed can’t hike through Q3, this could be a good trade. This structure should stay noticeably positive as long as eases are priced further out the curve. We had dips lower in the past, but that was before the Fed went uber-dovish, and hikes were priced into the curve.
2) Sell FFN93 3mo fly @ 2.5 (traded out) to 3. With all the FFV9 liquidation, this has shot up. The OIs are starting to indicate they are slowing. They may be close to done. The other reason to like this trade is that if the Fed were to hike, I think Q4 is probably the most likely timing, assuming a trade deal gets done in Q2 and we have a few months of solid data.
3) Or you can do a combination of the above and try to buy the FFJ9 3mo double fly.
These aren’t great trades, but if you think the FFV9 seller is done, these could provide some short-term flipping value, in addition to being positive expected value.

CHART of FFJ9 3mo double fly:
Market
The Recessioners have evacuated from the Q3 ease, and have regrouped around the Q4 ease. There are now only 5bps of ease priced into Q3, while there are 3.2bps in Q2 and 8bps in Q4 (6+ bps for the Dec meeting, which is 50% larger than any other meeting). Q2 looks too high relative to Q3. As I have been saying for some time, the odds of a Q2 ease are fairly small, with one of two Q2 Fed meetings coming up in 3 weeks (where the Fed is unlikely to do anything). I mean GDPNow has Q3 GDP at 2.3%. That is sizzling (relative to Fed projections)! But there is plenty of time for the Fed to ease in Q3 (not my core view).
Trade
I was looking at ease plays, and the I think the following is a great look for the “catastrophic” scenario (no China trade deal, things escalate, stocks collapse): Buy 3x 0EM9 98.00 calls and sell 2x 2EM9 98.00 calls @ 0 (just traded). The premise is that if the Fed has to ease (make new highs), that they will be moving in 50+bp clips. It only takes less than 5 meetings for us to get to the zero bound. We will be long all these extra calls, which could be up 100+bps. While EDM0-M1 is -10.5 now, it could even steepen after an aggressive Fed ease. We should know by May whether we have a trade deal or not. If we get a trade deal, then the options will end up OTM. If not, we get a cheap look at a blow-up. As you can see from the chart, when there is a crisis, this structure goes higher (even accounting for the lower term premium now).

CHART:
Market
When I look at the week for the US, Wednesday’s CPI could keep the front whites offered (assuming Libor being constant), since rising oil probably could give some upside to the headline print (not necessarily core). However, we do get the minutes from a very dovish Fed later in the afternoon, which could cause some demand in the longer end. Yes – I am a flattener broken record. I am somewhat dubious the Fed is going to more dovish than the market interpretation at the meeting. But before all of that, we get the ECB meeting. EU data has shown some life, so it’ll be interesting to see if the ECB tone changes.

Speaking of the Fed, there have been two storylines I want to dispell:
• Trump mentioned QE Friday and some speculated that is why the curve flattened. I just want to mention that while Powell is a Republican, a large majority of the Federal Reserve are Democrats. And an even larger majority think that Trump is an a*s… to the point where they are more likely to do the OPPOSITE of what Trump says, rather than follow it (see Dec meeting).
• Moore and Cain (both uber-doves) may urge the Fed to ease (assuming they even get approved). Two votes won’t matter much, when the current uber-dove (Kashkari) doesn’t think we need an ease. Two votes, by people who are considered “not bright” and political shills are going to carry ZERO weight on the Fed. In fact, they may be given a seat in the corner of the Fed conference room… facing the wall. Clarida may make the conical dunce hats himself. This is another non-story.
Market
EDU9 OI increased 44K, and FFV9 OI declined 5K. FFV9 through FFG0 OI declined 11.5K. EDU9 and FFV9 are the volume leaders this morning in EDs and FFs respectively. The OI and volume moves seem to corroborate my view that the FF buyer is unwinding his position. I think if you thought the Fed could ease in Q3, you can consider buying FFN9 3mo fly @ 3 (if you think no June ease) or selling FFV9 3mo fly @ 2. However, these aren’t spectacular levels, unless you had a strong view.
Trade
In terms of new trades, I suggested rolldown trades in the reds. I’m not sure the greens should be selling off as much as the reds. I think selling EDU0-U1 @ -4.5 is a little better now than selling EDU0-H1 @ -4.5. I also continue to like selling EDZ0 6mo fly and EDH1 6mo fly. My favorite trades right now are:
• Selling EDZ9 3mo fly @ -2 (the year-end turn is 4+bps, so this is way too high if the Fed can ease in Q1 of next year).
• Selling FFV9-X9 [cue broken record] [cue broken record], preferably on any pop. I think FFN9-Q9 is a little early considering the data has been holding up, but we do have the Brexit deadline, so if FFN9-Q9 gets to -0.5, with no possibility of an ease, that looks insanely good (assuming no China trade deal). But FFV9-X9 will take much longer to roll.