Longer Term Fed Funds Are Back!

April 15th, 2018|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 [...]

Normalization Timing

March 11th, 2018|Positioning|

The two big stories this year are: (1) Libor increasing and (2) Kong buying EDZ8-Z9.  These two factors have had a negative impact on the back of the whites.  Kong has also had a negative impact on the steepness of the curve past EDZ9.  Kong has had an indirect effect on the curve past EDZ0, since there appears to also be some chunky EDZ9-Z0 buying from time to time, in response to Kong’s EDZ8-Z9 buying.  The question is, when do these two factors turn? There’s some probability the correction could happen at any day.  We have had some false normalization [...]

White (Pack) Normalization

March 4th, 2018|Positioning|

How things can change in a week!  A number of the things I mentioned last week are starting to normalize.  Apparently, I don’t live in Bizzaro World after all! The libor fixing stabilized. It’s only been a few days, but libor looks to be stable around here.  As per the chart I showed last week in the Trade Thoughts section, I do think we could get more EDM-FF narrowing as the year goes on, than is currently priced by EDM8-FF.  This makes owning EDM8-based call structures attractive, as both a libor play and a crisis play.  The other thing we [...]

White (Pack) Noise

February 25th, 2018|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

February 18th, 2018|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

January 21st, 2018|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

January 14th, 2018|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 [...]

Straddle Selling

December 17th, 2017|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 [...]

Curve Flattening is Not Signaling a Recession

November 19th, 2017|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 [...]

Lower Inflation vs Stronger Growth

October 15th, 2017|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 [...]