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 [...]

BONUS: Simple Yield Curve Scenarios

October 8th, 2017|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

October 1st, 2017|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

October 1st, 2017|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

September 24th, 2017|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 [...]

Cute Chart – QE “Caused” Rates to Rise

August 27th, 2017|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 [...]