Tails and Options Pricing

July 29th, 2018|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

July 1st, 2018|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 [...]

Fed Comprehension Fail

May 27th, 2018|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

May 20th, 2018|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 [...]

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 [...]