Tails and Options Pricing

By | July 29th, 2018|Categories: Positioning|

In a headline dependent market, things can change in a hurry.  We saw some of this last week, as we had surprising progress in trade talks with the EU.  We could get a number of game-changing headlines in the next few weeks: Substantial trade progress (or lack thereof) with any of our key trading partners, Any surprising moves by central banks (in particular the BOJ), Any surprising economic data, Any surprisingly large move in equities, and Any serious frictions with Iran/Russia/China. In addition, we always have the usual terrorism, Trumpidity, etc risks.  Usually, I’ll look at the curve and see [...]

Inverted Yield Curve

By | July 1st, 2018|Categories: Featured, Positioning|

Some of the FOMC members have been saying they don’t want to invert the yield curve, but sections of the ED yield curve have already inverted.  For the past few weeks, EDH0-H1 spread through EDZ0-Z1 has been negative.  I think this will be a permanent feature of the yield curve going forward, barring some miraculous appearance of the term/risk premium.  There are a number of reasons for this: The Fed statement. The Fed took out the forward guidance that implied that they would stay accommodative.  In theory, as long as the Fed stays accommodative, the longer end of the curve [...]

Surprising Central Banks and the Curve

By | June 17th, 2018|Categories: FOMC|

After a number of snoozer central bank meetings, we had several surprises from the Fed and ECB.  These surprises have caused a number of minor regime changes on how some local parts of the ED and ER curves should trade.  Here are some of the key things that will affect the yield curves going forward: The Fed removed forward guidance to remain for some time below longer term neutral rates. This was expected at a meeting later in the year, but it was a little surprising it occurred so soon.  The Fed was not going to hit “neutral” for a [...]

Fed Meeting Thoughts

By | June 10th, 2018|Categories: FOMC|

Next week’s Fed meeting could be important to gauge their thinking in the midst of various uncertainties – trade (tariffs) and the effect of the recent tax stimulus.  Here are some things I’ll be looking for from the Fed, and some trades I am considering implementing. The statement should be a snoozer, with a hawkish bias from the better economic data. I think a hawkish tilt will be the baseline expected from the markets in the economic conditions section.  I don’t expect a major change in the rest of the statement.  The reason is because of the uncertainties around trade [...]

Fed Comprehension Fail

By | May 27th, 2018|Categories: Positioning|

I was amazed that FFV8 sold off as much as it did, but I am equally amazed that it rallied 8bps last week off of the Fed minutes.  I had been telling clients for weeks that the Fed Funds were too cheap – both from an additional-FFER-move perspective and a Fed hike probability perspective.  I gave reasons to think there were tail risks of the FFER coming in lower from what the markets were pricing in – including the Fed managing the FFER as it got closer to the upper end of the target range.  The Fed minutes did have [...]

Planet of the Apes

By | May 20th, 2018|Categories: 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|Categories: 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 [...]

Longer Term Fed Funds Are Back!

By | April 15th, 2018|Categories: 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 [...]

The Fed’s Overshoot

By | March 25th, 2018|Categories: 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|Categories: 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 [...]