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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 [...]

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 [...]

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 [...]

Cute Fact – Years Ending in 7

By | August 27th, 2017|Economy|

There’s a cute statistic going around that in the second half of years ending in 7, the equity markets have had poor returns: 1987 (Black Monday), 1997 (Asian Crisis), and the 2007 (Financial Crisis).  Whaddaya know?  2017 also ends in a “7.”  And we just happen to be in the second half of the year. There are a few candidates for catalysts: any of several possible Trumpidity Crises, a North Korean Crisis, an auto subprime Crisis, the brick and mortar collapse crisis, the divided nation Crisis, the Gulf of Mexico Swallowed My Glasses Crisis… the list of possibilities are long.  [...]

Bad Marriage

By | August 20th, 2017|Economy|

The Republicans in Congress are in a strange situation with Trump.  It’s like being married to say an embarrassing drunk… you’re constantly afraid of the next stupid thing to come out of their mouth, you don’t want to be seen with them, and they make you look bad at work functions.  You want to get a divorce, but you have to stay with them for the kids.  Last week, I was very concerned that Trump was going to take any legislative stimulus and possibly the economy down with him, because he would become someone no one wanted anything to do [...]

Korean Tensions

By | August 13th, 2017|Economy|

As a Korean-American and someone who likes to think about game theory, I have some thoughts on the Korean situation.  We had the start of a crisis rally last week.  It’s always difficult to see how much panic is going to be priced into the market.  Putting my thoughts down on paper helps me organize my trade thoughts: There is “ZERO” chance that North Korea will launch a missile at the US (Guam) first. You may have noticed that I used three qualifiers.  The odds for something like a missile launch can never be truly zero.  So let’s call this [...]

Inconsistent Reflation?

By | August 6th, 2017|Economy|

It’s becoming clear that the markets want to price in some kind of libor widening ahead of the high-probability tapering coming in September.  This makes sense – as the Fed stops buying assets, you would expect that spreads should widen.  However, there are a few inconsistencies currently priced into the markets: Longer rates don’t seem to want to go higher. What happens if the Fed tapers and rates don’t rise?  Should we expect ED spreads to widen to FFs?  Right now, EDU7-H8 vs FF are the steepest they have been in a while.  Part of this is a high settle.  [...]

Rates Decision Point

By | July 9th, 2017|Economy|

Gundlach and Dalio were out last week saying that rates have more to climb.  I agree in the longer term (I think ten year yields are more likely to make new highs than new lows), but I’m not sure about direction in the short term.  Nothing in the past few weeks has really changed the “weakish US data and the Fed doesn’t have much to hike” narrative.  The only thing that happened was that some central bankers (especially Super Mario) sounded a little hawkish.  Sounded hawkish, but you know he’s going to act dovish for as long as he can.  [...]

Rates Blowout Potpurri

By | July 2nd, 2017|Economy|

I haven’t been very active the past few weeks – mostly because I have been trying to make sense of how the markets could possibly be flattening when all things have been pointing to a massive steepening: (1) The Fed and ECB Pillars of long rates cracking as they get closer to tapers later this year, combined with (2) higher longer term rates causing equities to correct on a valuation basis.  One would think this double tightening of financial conditions would extend out the Fed’s “gradual” hiking approach.  We did get a reasonable steepening last week, but we are far [...]