White (Pack) Noise

By | February 25th, 2018|Categories: Positioning|

There are a bunch of strange things going on in the front of the curve (next 12 months).  It’s been a really long time since I’ve seen so many unusual cross-currents go through at the same time: The libor fixing is going nuts. EDH8 vs FF has widened about 21bps since January 23.  Part of that is just us breaking the multi-decade tens downtrend line – you would expect some widening of ED-FF spreads on a selloff.  And part of this is EDH8-FF going from being about 5bps narrower than libor-FF to 6bps wider than libor-FF.  The popular narrative is [...]

Trading Around a Monster

By | February 18th, 2018|Categories: Positioning|

It has been many years since I’ve seen flows this aggressive and wacky on the US rates curve.  It appears King Kong (the EDZ8-Z9 buyer) likes to try and pound square pegs into round holes.  The curve has wanted to flatten, but he insists on keeping EDZ8Z9 steep.  I thought he was done after the stock market correction, as the OI in EDZ9 declined noticeably.  But he came back even stronger.  This was very unexpected, since seeing how the greens led a crisis rally (thanks to him keeping the curve steep) should have made him realize that EDZ8Z9 was going [...]

Large Volumes, Part II

By | January 21st, 2018|Categories: Positioning|

I generally don’t like writing about the same topic on consecutive weeks, but in this case, I have to make an exception.  Consider how much the Open Interest has increased in the Z contracts since the end of 2017 (highlighted in yellow), since last week’s post.  And these do not include Friday’s trading!  [The OI data is one day delayed.] On Friday, 141K EDZ8-Z9 year spread and 128K EDH9-H0 year spread traded.  I’m guessing both of these flows are new positions.  These are some large volumes – especially in the case of a non-Z year spread like EDH9-H0.  Consider that [...]

Large Volumes, Part I

By | January 14th, 2018|Categories: Positioning|

I’m a big believer in adjusting to what the markets give you.  One of the ways we may get some relative value trading opportunities is when we see large flows that distort the curve.  The premise would be that these positions would need to be unwound eventually – either from taking profit or stopping out.  Even if they do not, we may be able to find a structure that is superior for the same view as the large flow. Since some of the volumes have been eye-opening, I wanted to look at the changes in ED and FF contracts since [...]

Fed Hikes

By | January 7th, 2018|Categories: FOMC|

For the New Year, let’s go back to the basics and see what the markets are pricing in for the FOMC in 2018.  The most common refrain I hear is “three hikes in 2018.”  I can see that.  There appears to be more “smoothing” on the Fed Fund meeting curve than I remember.  What are the odds that the March, June, Sept and Dec Fed meetings all fall on a straight line?  I’m not sure the meetings should be this orderly in a potentially volatile year.  I mentioned last week how straight the one year fly curve was last week.  [...]

Straddle Selling

By | December 17th, 2017|Categories: Positioning|

Almost two months ago, I was watching some large players sell the EDZ7 98.50 straddle for about 6-7.  At the time, libor-FF was very stable, but it was not a “sure thing” that the Fed was going to hike in Dec (maybe around 80% priced).  I didn’t have a strong view on the level of the straddle.  It seemed like it was very fractionally positive EV at the time.  But I prefer finding “zero cost” ways of owning the tails, rather than being short volatility in this environment. Well, lo and behold, we got a funding “event” and that EDZ7 [...]

Three Fresh Prespectives on the FOMC

By | December 10th, 2017|Categories: FOMC|

The US Federal Reserve is expected to raise their policy interest rate 25 basis points this week.  The Fed will also increase the pace of its balance sheet reinvestment tapering, by increasing the unreinvested amount from $10 billion to $20 billion.  We also get a new set of dot plots, which could show a change of direction in Fed policy, but will most likely remain the same.  Despite all the potential activity that is going on, most analysts would consider this a relatively “ho-hum” meeting.  The markets agree, based on the declining interest rate volatility.  Amid this complacency, I thought [...]

Curve Flattening is Not Signaling a Recession

By | November 19th, 2017|Categories: Positioning|

I’ve been saying for weeks now why the curve was probably going to flatten.  I discussed how the other central bank policies could act like a bungee cord, holding the longer end US rates down.  Last week, we got Draghi comments that inflation can not be self-sustaining without stimulus.  And we got lower-than-expected Japanese GDP.  So despite the stronger US data, the longer end rallied for the week, partly because the bungee cord shows no signs of fraying. As analysts come on TV to discuss the flattening of the yield curve, the interpretation I think is incorrect in the current [...]

Fed Pricing 171105

By | November 5th, 2017|Categories: FOMC|

There seems to be two large flows going on right now in the front of the curve.  I had previously mentioned our EDZ8-Z9 friend, who appears to be on the wrong side of EDZ8-Z0 flattening.   But the other development showing up on the radar is a large short in EDM8.  In the past two weeks, EDM8 OI has increased 56K, while the rest of the whites decreased 205K.  From the curve move, we can see that EDM8 position was a short.  The EDZ7-M8-Z8 fly increased 4.5bps in the past week.  That is a little strange when the Fed has signaled [...]

Lower Inflation vs Stronger Growth

By | October 15th, 2017|Categories: Positioning|

Last week I said for the bullish scenario that Z8Z0 could get to the low (28.5) and we may be able to rally 10bps.  Well, that’s what happened.  We had several pieces of bullish news: (1) the lower CPI on Friday, (2) The Fed being concerned with “non-transitory” low inflation from the minutes, (3) the strong bond auction despite potentially strong economic data the following day, (4) Trump cutting back on healthcare payments (higher costs to consumers and potentially slowing the economy), (5) Trump decertifying the Iran deal, (6) a non-hawkish ECB taper plan, (7) no progress on tax reform [...]