ED-FF Spread

By | May 8th, 2017|Featured, Positioning|

[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

By | May 8th, 2017|FOMC|

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

By | April 30th, 2017|Positioning|

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, [...]

A Caveman’s View of Frexit

By | April 23rd, 2017|Economy|

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

By | April 16th, 2017|Economy|

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

By | April 9th, 2017|Economy|

[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 [...]

Dudley More

By | April 2nd, 2017|FOMC|

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

By | March 26th, 2017|Positioning|

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

By | March 19th, 2017|FOMC|

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?  [...]

Widen Your Trading Horizons

By | March 13th, 2017|Basics, Featured|

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 [...]