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 [...]

Smoothing the Curve

By | December 18th, 2016|Categories: Positioning|

As we have seen the past few weeks, blindly smoothing the interest rate curve can have disastrous results: Meeting to Meeting: We have seen for some time that the quarterly meetings are going to be priced higher than non-quarterly meetings. When doing an analysis of a trade structure, it’s important not just to see how many meetings you are getting long or short, but which meetings you are getting long or short.  As we’ve sold off, the absolute discrepancy between the quarterly and non-quarterly meetings have grown.  At some point, it may be more attractive to take a relative overweighted [...]

Less Liquidity in the Long End

By | December 11th, 2016|Categories: Positioning|

[Liquidity has since returned to the curve, but not before we were able to take profit on some trades and get some things on at favorable levels]   The other week, I mentioned that some locals may have blown up on three month fly trades in the whites.  I think some market participants had been “smoothing” the front of the fly curve, without really thinking about what was being priced into the curve.  I suppose if you are young enough, you’ve mostly seen smooth 3 mo fly curves.  I may discuss “smoothing the fly curve” further in a future issue [...]

Watch out for March 2018

By | December 4th, 2016|Categories: Featured, Positioning|

I have a whole discussion of the U7 3mo double fly that traded about 100K times last week (including an 80K block trade) in the Appendix emails.  The tl;dr (too long; didn’t read) takeaways and additional implications are: The March 2018 meeting is going to be the first meeting with a potentially new Fed Chair.[1] This meeting has more risk of a “break” in the typical pattern of Fed meetings, and that part of the curve is more susceptible to a severe kink. A large market participant (the “800lb” gorilla) is selling EDH8 (buying the March 2018 meeting). Open interest [...]

Noise In Fed Funds Futures

By | November 27th, 2016|Categories: Positioning|

Marketwatch reported last week that there was a 100.2% probability of a Dec Fed hike.  Umm… that would be wrong.  But the reason I bring this up is that it is not clear what the new FF effective rate (“FFER”) would be after the hike.  If Marketwatch thinks the new FFER is going to be 64bps after a hike, their “analysis” could be right.  The FFER is currently 41bps, and the “easy” thing to do would be to assume it will be 25bps higher (to 66bps).  You could even model the three month-end days in January 2017 to get something [...]

Trade Thoughts Part 4 of 4: Email Updates

By | November 13th, 2016|Categories: Positioning|

[During the week, I send email updates on any market or trade developments I find interesting.]   Email sent on November 18, 2016 [Flip Note - TIP]: We had a dip in Z1Z2 down to 14.5 this past week.  But it has since recovered.  This has been a nice choppy (enough) range for us to flip.  The one thing I wanted to mention in conjunction with my previous comment about unfavorable closes is that you can consider selling some U1U2 spread against the Z1Z2 position, if you think you can sell 2 bps higher than Z1Z2.  This is the relationship [...]

Trade Thoughts Part 3 of 4: Flip Trades

By | November 13th, 2016|Categories: Positioning|

[Nov1 17: The Newsletter has a dedicated section for traders who like to job tight ranged trades, that can be scalped for a small profit.  These were my recommendations from the weekend.  In addition, I suggested buying EDZ9 1 year fly as a flip in an email during the week.  Watch tomorrow for my week-end thoughts.]   Now that we have had a regime change, we need to be more cautious. Within the first 12 contracts, I think for now, we should just scrap everything, give it a little time.  The Flip Trades were focused on making money in the old [...]

Trade Thoughts Part 1 of 4: A General Impression

By | November 13th, 2016|Categories: Positioning|

I mentioned this in the email last week, but it seems to me that the markets are overly focusing on the “meaty” part of the curve.  That’s fine – when you expect a big move, it’s perfectly understandable to do that.  But one of the great things about curvature trading is that you get to pick up the value that the markets leave behind.  The markets seem overly fixated on some kind of EDZ7-Z9 calendar spread steepener.  It seems strangely bid all the time.  That’s a perfectly fine trade if you are super-bearish, but it’s high relative to the rest [...]