BONUS: Simple Yield Curve Scenarios

By | October 8th, 2017|Positioning|

Now that we have Data Week over with, the rest of the month should have less noise than average.  However we have the following considerations for the rest of the month: North Korea. As mentioned previously, there is a 1.5 week window between China’s Golden Week, and the National Congress.  What a “coincidence” that we got some chatter for early next week!  I’m not sure we get anything, but the market is probably very short fixed income.  The last JPM survey was extremely short, and we sold off more last week.  While I think we did get some short covering [...]

The 30 Year Downtrend Line

By | October 8th, 2017|Economy|

I was listening to Bill Gross on Friday and he mentioned that we will be hitting the 30 year downtrend line in ten year Treasuries between 2.4 and 2.45% (currently 2.37%).  Gundlach made fun of Gross’s line-drawing skills last year.  My line drawing skills are just as bad.  I have no idea what people look at – cash, futures, constant maturity, daily/weekly/monthly, high/close, etc.  It’s like asking the proper way to stick the pins on a voodoo doll, when you don’t believe in voodoo.  I look at it occasionally only because others in the market look at it.  If the [...]

BONUS: “Free” Straddle

By | October 1st, 2017|Featured, Positioning|

From time to time, I'll post an occasional trade.  You'll need a reasonable cost structure to take advantage of this opportunity. On Friday I sent out the following trade: I saw EDZ7 98.625 call trade 1.5 and that seemed really cheap.  The premise of the trade is to get a "zero cost" straddle.  In fact, according to my numbers, I think you GET PAID for owning this straddle.  This would be to buy 100 EDZ7 98.625 call vs Sell 12 FFF8. I'll do the full write-up this weekend.  But basically, the EDZ7 call traded 10K times at 1.5.  FFF8 should [...]

ED-FF is Steep

By | October 1st, 2017|Positioning|

I mentioned in client emails that I prefer taking Fed hiking views in FFs, and I wanted to explain a little more fully.  One of the things I have been doing more work on this year is looking at opportunities on the ED-FF curve.  We had a nice trade when we bought EDH8-U8 spread vs FFJ8-V8 spread at 1 and 0.5 and recently got out at 3bps. The ED1-ED5 vs FF spread curve has been wide relative to the past few months.  It’s possible it can widen more, with the recent Fed tapering which may cause spreads to widen as [...]

BONUS: Trade Thoughts

By | September 24th, 2017|Positioning|

For the rest of this month, I'll reprint the Trade Thoughts section of the CA Newsletter.  There are seven parts to the Newsletter: (1) My take on the events of the previous week, (2) A summary of where I see value on the curve, (3) The Weekly Essay, which you can access on the web site or receive in the CA Digest, (4) Trade Thoughts, where I discuss a particular area related to trading (Fed pricing, ED-FF spread curve, interesting technicals, trade basics, or where I see some value in a trade), (5) The Flip Trade Update, where I discuss trades for jobbers, (6) The [...]

Fed Dot Surprises

By | September 24th, 2017|FOMC|

I know the markets have been ignoring the Fed’s dots for some time now.  But as I always say, as the meetings get nearer, the Fed dots get more accurate.  For example, the day before a meeting, if you were to do this exercise and 12 of 16 members wanted a hike… they will be hiking.  I wanted to point out some of the more interesting features from the dots. The Core summary. I typically like taking out the high 6 and low 2 dots - just to weed out the riff-raff and see what the center of the group [...]

Legging Lessons

By | September 17th, 2017|Basics, Featured|

Since some of you may be new to ED trading, I may occasionally do a “Trade Basics” segment.  There was an interesting trade that went through on Friday, and I thought I would discuss it.  Almost 25K EDU7-EDV7 spreads traded.  This is a crazy amount to have traded, considering the open interest on EDV7 is only 103K contracts.  I’m assuming this is probably some kind of unwind.  There appears to be an equally unusually large volume on this spread trade on August 2, and since EDU7 rolls off Monday, it seems reasonable to conclude that this was an unwind of [...]

The Tapering Fed Meeting

By | September 17th, 2017|FOMC|

One of the things about the “gradual and communicative” Fed is that they pretty much tell us most of the important things we need to know well in advance.  No one said anything about a hike (even the hawks) so the odds of a hike at the September meeting is basically “zero.”  They have also communicated for the past two meetings that tapering is coming, so the odds of the Fed not announcing the taper at this next meeting is also basically “zero.”  I suppose there could be some question about when tapering would start.  My “pick a date out [...]

Short End Shenanigans

By | September 10th, 2017|Economy|

Since the macro rates picture has been hard to decipher, I think this is a good time to look at the micro.  There are a lot of interesting things going on in the very short end of the curve right now: I. An ease is more likely than a hike. As I mentioned earlier in the week, FFV7 and FFX7 are starting to price in an ease.  FFX7 should settle at 98.843 on a typical non-event month.  Not only did 98.845 trade, it went bid late Friday and some 98.85s traded.  That’s a little crazy, considering we’ve had no new [...]

The Long Term Treasury Rate and Fed Funds Target

By | September 3rd, 2017|Economy|

Last week, Kaplan suggested that his long term neutral FF rate was closer to 2.5% than 3%.  I’m going to assume that his dot is going to be at 2.625% later this month.  This got me to thinking about the relationship between the Fed’s mean long run Fed Funds rate projection from the SEP[1] and the 30 year Treasury rate.  The Fed actually sets the target Fed Funds Effective rate (“FFER”), and there is generally a tight relationship between the FFER and Treasury rates.  I know people who think of longer run Treasury rates as a strip of Fed Funds [...]