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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 [...]

BONUS: Simple Yield Curve Scenarios

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

Now that we have Data Week over with, the rest of the month should have less noise than average.  However we have the following considerations for the rest of the month: North Korea. As mentioned previously, there is a 1.5 week window between China’s Golden Week, and the National Congress.  What a “coincidence” that we got some chatter for early next week!  I’m not sure we get anything, but the market is probably very short fixed income.  The last JPM survey was extremely short, and we sold off more last week.  While I think we did get some short covering [...]

BONUS: “Free” Straddle

By | October 1st, 2017|Categories: Featured, Positioning|

From time to time, I'll post an occasional trade.  You'll need a reasonable cost structure to take advantage of this opportunity. On Friday I sent out the following trade: I saw EDZ7 98.625 call trade 1.5 and that seemed really cheap.  The premise of the trade is to get a "zero cost" straddle.  In fact, according to my numbers, I think you GET PAID for owning this straddle.  This would be to buy 100 EDZ7 98.625 call vs Sell 12 FFF8. I'll do the full write-up this weekend.  But basically, the EDZ7 call traded 10K times at 1.5.  FFF8 should [...]

ED-FF is Steep

By | October 1st, 2017|Categories: Positioning|

I mentioned in client emails that I prefer taking Fed hiking views in FFs, and I wanted to explain a little more fully.  One of the things I have been doing more work on this year is looking at opportunities on the ED-FF curve.  We had a nice trade when we bought EDH8-U8 spread vs FFJ8-V8 spread at 1 and 0.5 and recently got out at 3bps. The ED1-ED5 vs FF spread curve has been wide relative to the past few months.  It’s possible it can widen more, with the recent Fed tapering which may cause spreads to widen as [...]

BONUS: Trade Thoughts

By | September 24th, 2017|Categories: Positioning|

For the rest of this month, I'll reprint the Trade Thoughts section of the CA Newsletter.  There are seven parts to the Newsletter: (1) My take on the events of the previous week, (2) A summary of where I see value on the curve, (3) The Weekly Essay, which you can access on the web site or receive in the CA Digest, (4) Trade Thoughts, where I discuss a particular area related to trading (Fed pricing, ED-FF spread curve, interesting technicals, trade basics, or where I see some value in a trade), (5) The Flip Trade Update, where I discuss trades for jobbers, (6) The [...]

Fed Dot Surprises

By | September 24th, 2017|Categories: FOMC|

I know the markets have been ignoring the Fed’s dots for some time now.  But as I always say, as the meetings get nearer, the Fed dots get more accurate.  For example, the day before a meeting, if you were to do this exercise and 12 of 16 members wanted a hike… they will be hiking.  I wanted to point out some of the more interesting features from the dots. The Core summary. I typically like taking out the high 6 and low 2 dots - just to weed out the riff-raff and see what the center of the group [...]

The Tapering Fed Meeting

By | September 17th, 2017|Categories: FOMC|

One of the things about the “gradual and communicative” Fed is that they pretty much tell us most of the important things we need to know well in advance.  No one said anything about a hike (even the hawks) so the odds of a hike at the September meeting is basically “zero.”  They have also communicated for the past two meetings that tapering is coming, so the odds of the Fed not announcing the taper at this next meeting is also basically “zero.”  I suppose there could be some question about when tapering would start.  My “pick a date out [...]

Cute Chart – QE “Caused” Rates to Rise

By | August 27th, 2017|Categories: Positioning|

A cute chart that has been going around is this idea that QE caused rates to INCREASE.  Therefore, tapering should cause rates to DECREASE.  <crickets>  As absurd as this sounded, I had to whip out the chart to take a look. Sure enough, after QE (and Operation Twist, denoted as “OT”), rates did increase soon thereafter.  But that would be an oversimplification.  To me, the main takeaway from the chart is that the markets are forward-looking and anticipatory – sometimes overly so. QE1 and the Taper Tantrum were two events that may have caught the markets off-guard. That is why [...]

Bearish Market Developments?

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

We are now in an environment where we have growth, but no inflation.  This is great for businesses and consumers.  This is not so great if you are a trader, as we could just sit around here, barring some catalyst.  But we get the big monthly data week next week and we are data-dependent.  While my central tendency is to think that we just sit here the rest of the summer, I am feeling better about finally taking some outlier tail views. We had two notable developments on the curve last week – interestingly at the very extremes of the [...]