Probability Distributions of EDZ8

By | July 29th, 2018|Basics, Featured|

[Below is a Trade Thought essay that discusses a real-world application of the options article I wrote for the CME]   This will probably be a multi-part series.  This week, I wanted to discuss the pricing of the front options flies.  Clearly from the FFV8 pricing and lack of movement, the markets just do not think the Fed is going to skip in two months.  We can easily cover the skip scenario by buying FFV8.  We should wait until the August meeting has passed in a few days.  I also don’t think the Fed is going to hike more than once a [...]

Tails and Options Pricing

By | July 29th, 2018|Positioning|

In a headline dependent market, things can change in a hurry.  We saw some of this last week, as we had surprising progress in trade talks with the EU.  We could get a number of game-changing headlines in the next few weeks: Substantial trade progress (or lack thereof) with any of our key trading partners, Any surprising moves by central banks (in particular the BOJ), Any surprising economic data, Any surprisingly large move in equities, and Any serious frictions with Iran/Russia/China. In addition, we always have the usual terrorism, Trumpidity, etc risks.  Usually, I’ll look at the curve and see [...]

Market Reactions

By | July 22nd, 2018|Economy|

Last week, we had Trump causing waves with this Putin meeting, and ending the week talking about tariffs on ALL of our imports from China.  We had the following weekly reaction from the markets: S&P was unchanged, ED white pack was down 0.6bps, and ED gold pack was down 6.4bps. While the pricing in any given week can be all over the place (especially a low volume summer week), this was curious when Trump noticeably escalated trade tensions with China.  It’s not clear to me if: (1) the markets are underestimating the potential growth tail risks of a full-blown trade [...]

My Tariff Central View

By | July 8th, 2018|Economy|

The markets just don’t seem to care about the trade tariffs.  Stock have been chopping around in a tight range, and the front end of the FF curve is pricing in roughly the same amount of hikes.  The argument I hear all the time is that at the end of the day, a 25% tariff on $34B if imports is not going to have much of an effect on a $19 TRILLION economy like the US.  I suppose that’s true.  But you have to factor in that this dispute with China could escalate to $500B, and that we have similar [...]

Inverted Yield Curve

By | July 1st, 2018|Featured, Positioning|

Some of the FOMC members have been saying they don’t want to invert the yield curve, but sections of the ED yield curve have already inverted.  For the past few weeks, EDH0-H1 spread through EDZ0-Z1 has been negative.  I think this will be a permanent feature of the yield curve going forward, barring some miraculous appearance of the term/risk premium.  There are a number of reasons for this: The Fed statement. The Fed took out the forward guidance that implied that they would stay accommodative.  In theory, as long as the Fed stays accommodative, the longer end of the curve [...]


By | June 24th, 2018|Economy|

Whenever I have a hard time with macro views because of news uncertainty, I like thinking about scenarios.  Most people think only about the current yield curve, but you can also look at the conditional yield curve - the yield curve implied by the options market.  You can use this conditional yield curve to structure trades such as: if ED6 is at price x by time a, then ED10 should be at y by time b.  Typically, a = b, but this is not necessary.  This may be the topic of a future CA.  For now, I just want to [...]

Surprising Central Banks and the Curve

By | June 17th, 2018|FOMC|

After a number of snoozer central bank meetings, we had several surprises from the Fed and ECB.  These surprises have caused a number of minor regime changes on how some local parts of the ED and ER curves should trade.  Here are some of the key things that will affect the yield curves going forward: The Fed removed forward guidance to remain for some time below longer term neutral rates. This was expected at a meeting later in the year, but it was a little surprising it occurred so soon.  The Fed was not going to hit “neutral” for a [...]

Fed Meeting Thoughts

By | June 10th, 2018|FOMC|

Next week’s Fed meeting could be important to gauge their thinking in the midst of various uncertainties – trade (tariffs) and the effect of the recent tax stimulus.  Here are some things I’ll be looking for from the Fed, and some trades I am considering implementing. The statement should be a snoozer, with a hawkish bias from the better economic data. I think a hawkish tilt will be the baseline expected from the markets in the economic conditions section.  I don’t expect a major change in the rest of the statement.  The reason is because of the uncertainties around trade [...]

Game Night and Wages

By | June 3rd, 2018|Economy|

Every now and then, we’ll have Game Night with some good friends of ours.  One friend works at one of the largest companies in the US, and the other works in a small multinational firm.  Usually we’ll have an hour or so to chew the fat before dinner and occasionally, I’ll ask them how the economy looks from their perspective. This time, I was really curious about wages, so I asked them about how salaries worked at their firms.  It’s been over a decade since I worked for a company, and I was very surprised at how wage increases were [...]

Fed Comprehension Fail

By | May 27th, 2018|Positioning|

I was amazed that FFV8 sold off as much as it did, but I am equally amazed that it rallied 8bps last week off of the Fed minutes.  I had been telling clients for weeks that the Fed Funds were too cheap – both from an additional-FFER-move perspective and a Fed hike probability perspective.  I gave reasons to think there were tail risks of the FFER coming in lower from what the markets were pricing in – including the Fed managing the FFER as it got closer to the upper end of the target range.  The Fed minutes did have [...]