Planet of the Apes

By | May 20th, 2018|Positioning|

You’ve heard me talk about Kong (the EDZ8-Z9 buyer) for most of the year.  I’m not sure if I’ve seen too many of the Planet of the Apes movies, but I seem to be seeing signs of large market participants all over the place. I was telling some people that I thought I was strange that tens broke the key 3.05% rate and we didn’t take off.  It will be interesting to see what happens the next week or two before the next wave of key data. There are clearly large players in the market that have the size to [...]

Backing Out Fed Funds

By | May 13th, 2018|FOMC|

Have you ever seen that online ad, where they show you a bunch of fruit in a series of math problems, and you have to figure out what the value of each fruit is?  That’s exactly what I thought of when I looked at the Fed Fund futures.  The market price of the FF future would be the numbers on the right and you have to figure out what the factors being priced are (the fruit).  You use the values of the fruit from one level to work on the next. I had been trying to figure out why some [...]

Some Clarity

By | May 6th, 2018|Economy|

The outlook for the economy and Fed policy had been a little murky the past few weeks.  A number of things are starting to become clearer, from the Fed, data and news last week: The bar for the Fed being spooked by inflation is higher. The Fed went out of their way to put in “symmetric” TWICE in the FOMC statement.  This also makes an overshoot less likely.  Several Fed members (in particular Dudley and Williams) have come out and said that they are comfortable with inflation being somewhat higher than their 2% target.  I think the symmetric discussion probably [...]

The Next 25bps in US Tens

By | April 29th, 2018|Economy|

I was talking to someone at a dinner party and they asked me what I thought of yields, now that we went over 3% in tens last week.  For someone who looks at the yield curve all day, I have no strong conviction on direction.  Whenever this happens, I like listing all the arguments down and seeing which side makes more sense. THE BEARISH CASE We have strong global growth… more or less. The European data has faltered some, but there is no strong reason to think the growth couldn’t just keep chugging along at 2-2.5%, as it has for [...]

High Yields and Equities

By | April 22nd, 2018|Economy|

I ran across this chart yesterday (a retweeet from 13D Research and Bloomberg), and I thought it was interesting because we had some unusual price action Friday.  Normally, when equities drop almost 1%, you would expect fixed income to rally noticeably (especially after the volatility-driven market nervousness earlier in the year).  But the long end of fixed income actually sold off noticeably!  I suppose the longer end of the yield curve did (over)flatten the prior few months, so perhaps we were due for a correction. Since the volatility scare a couple of months back, it’s felt like fixed income has [...]

Longer Term Fed Funds Are Back!

By | April 15th, 2018|Positioning|

For many years post-recession, the Fed Funds curve was dead.  Then as whispers of Fed policy normalization came around, the Fed Funds within 6 months started to come alive.  Then the Fed Funds within one year were trading actively.  I was surprised to see that the volumes even past one year are finally showing signs of life.  On the right are the open interests in Fed Funds futures from this time the past three years.  There are a number of things to note: The open interest has steadily increased the past few years. The FFF9 OI of 309K is fairly [...]

Trade Tariffs Potpourri

By | April 8th, 2018|Economy|

The markets are difficult to trade directionally with the markets whipping around on trade tariff headlines.  We have no significant competitive advantage in trying to guess the outcome.  There are a lot of people out there with more information than we have – people who actually speak to the inner circles of Trump and Xi.  And even if we knew what the final outcome was going to be, it’s probably going to be a long process and we have no idea if the next major trade headline will move the markets the wrong way before moving the right way. The [...]

Q2 Preview

By | April 1st, 2018|Economy|

We could see extremely interesting price action this quarter.  There are a number of catalysts we had been anticipating in Q2.  Let’s look for opportunities in the next week or two in the following areas: Equities.  We had been looking forward to this next set of earnings for months now.  We should see the effects of the lower corporate tax rate and investment incentives.  We will also get the announcements on what will happen with the repatriated earnings.  I would think one of the reasons people have liked buying equities on dips is because of the anticipation of these pieces [...]

The Fed’s Overshoot

By | March 25th, 2018|FOMC|

One of my former colleagues at JPM was a rocket scientist – literally.  We once discussed how for some corrective system models, you can have a situation where you overshoot before eventually settling to the equilibrium.  That conversation was what I thought about when I saw the Fed’s dots last week. The way the Fed models tend to work is that there is a bit of an overshoot on rates, because Fed policy generally takes a number of months to take effect.  So if the Fed had the foresight of a bat, they would keep hiking as they saw inflation [...]

Fed Meeting Thoughts

By | March 18th, 2018|FOMC|

There are so many wacky things going on with Eurodollar futures, from libor blowing out to Kong buying EDZ8-Z9 in unprecedented sizes, that it’s hard to get a good handle on what is going on with short end interest rates just from looking at the EDs.  I haven’t seen the ED curve this messed up since the Libor crisis a decade ago.  But this time around, the economy is perfectly fine!  EDs are insane!!! Fortunately, we have Fed Funds, which gives us a cleaner look.  But even that has a little noise in it from the markets pricing in a [...]