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ED-FF Spread

By | May 8th, 2017|Categories: Featured, Positioning|

[From time to time, I will post trade-related commentary from the web site.  The EDM7-FF spread collapsed the following week and this trade thought has resulted in one profitable trade and the second order effect of the ED-FF curve steepening has given us a an initial profit on a second trade.] One of the more interesting developments this year has been how the ED-FF spread has collapsed.  Take for example EDM7 vs FF.  It was over 35bps at one point this year, and it settled over 15bps lower on Friday.  I suppose considering we’ve had a yield-grab rally, it makes [...]

Timing of Pricing in Hikes

By | May 8th, 2017|Categories: FOMC|

I thought it was interesting that the June meeting was about 80% priced with over 5 weeks to go.  I think the Fed is hiking in June as much as the next guy.  But that’s a lot of time to go – we could get unfavorable news, or the data could turn south, or we could get some market instability, etc.  Since a number of the previous hikes were “well telegraphed”, I wanted to see when the markets priced in the “likely” hike. The chart on above shows the number of weekdays until the respective FOMC meetings (x axis) and [...]

Z8-Z0 Flattening

By | April 30th, 2017|Categories: Positioning|

I sent out an email a week or two ago that showed Z8-Z0 locally peaking a few days before the FOMC meeting, and sure enough, we flattened strong on Friday afternoon.  Part of it may have been month-end.  The question then becomes, do we take out the low at 42?  There has been a strong flattening bias heading into the FOMC meetings, and soon thereafter. However, given the current shape of the curve, I would argue that this could be like swimming upstream.  Now I’m not saying we couldn’t flatten much more.  As you can see from the above chart, [...]

Dudley More

By | April 2nd, 2017|Categories: FOMC|

Dudley is the guy who said last year something to the effect that the Fed’s projections have an extremely wide standard error, and that people would be surprised at how wide it is.  Speaking of which, we should be getting the error bands around the SEPs at the June meeting.  So it’s interesting that he was as specific as he was in his interview, considering we are data-dependent.  I found a lot of interesting nuggets from his short interview: He is still a dove. He said “The consensus among many people is that the neutral FF rate adjusted for inflation [...]

A Suspicious Pattern

By | March 26th, 2017|Categories: Positioning|

I’m trying to decide if last week’s post-FOMC rally was (1) a “reading comprehension fail” by the markets, (2) unbelievably aggressive positioning/expectations going in, (3) or something else.  “Something else” always makes me a little nervous.                                                                                                  - CA March 26, 2016 It is becoming clear that there is “something else” going on in the interest rate markets.  We have seen an increase in long positioning in the JPM client survey.  The top three candidates for the additional bullishness are: (1) pricing in of less fiscal stimulus than expected, (2) Article 50 next week, (3) French election positioning, or (4) [...]

Fed Funds Update

By | March 19th, 2017|Categories: FOMC|

Now that we’ve had some Fed shenanigans and the odds on various meetings have changed, we should do an analysis of the Fed probabilities for the next 15 months.  There are a number of notable changes since the last time we looked at this. The non-quarterly meetings got killed. I mentioned two weeks ago that the Fed may be reluctant to hike at a non-quarterly meeting, based on how much they were in a rush to hike in March.  So this can be understandable.  Remember less than three months ago, when our FFX friend jacked up the non-quarterly meeting probabilities?  [...]

Fed Takeaways

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

When things don’t go as planned, I think it’s always good to take a step back and reflect.  Was the March hike something that could have been expected?  Maybe.  You just needed to think CPI would have lit as large a fire as it did under the FOMC.  I thought they would have needed some PCE corroboration.  But I suppose PCE inflation was firm month over month, even though it was in-line.  We learned a number of things from the events of the past week: We have no competitive advantage trying to guess what will happen at the next FOMC [...]

A Post-Tarullo FOMC

By | February 12th, 2017|Categories: FOMC|

There are some important implications of Tarullo leaving early: Trump gets to pick THREE Fed Governors, ONE Fed Chair (next Feb) and ONE Vice Chair (next June). Yellen and Fischer may not choose to stay after their terms as Chair and Vice Chair are over.  They could stay if they wished since their Board terms are not over until 2024 and 2020 respectively.  I would guess they choose to leave.  They are both pretty old, and the last thing you need in your golden years is to live in fear of being harassed via Twitter.  If they chose to leave, [...]

Surge in Non-Quarterly FOMC Meetings

By | January 8th, 2017|Categories: Positioning|

We had a noticeable shift about how the quarterly vs non-quarterly meetings are priced.  I mentioned in an email last week that there was a large increase in open interest in FFX7.  Since then, there has been a larger increase in OI.  Open interest in FFX7 increased over 250% the past week, from 10.0K to 35.4K contacts.  The other FF contracts had no notable OI change (other than FFF8 which has no meetings in it).  I was speculating this was some kind of “September FOMC” deferral trade, since it is unusual for someone to want to take a large position [...]

RIP Z Algo

By | December 25th, 2016|Categories: Positioning|

The table on the right shows the change in OI over the past “week” (the OI data is 1 day delayed, so from Thursday to Thursday).  The bulk of the move was from the previous Friday (Dec 16), but still, the size of the move was impressive – especially considering how quiet the markets have been. It looks like the “Z algo” was shut down, after being a major player on the curve for a few years.  We no longer see the large kinks in the Z contracts that we had been used to (see chart on left).  It certainly [...]