Strange New World

July 16th, 2017|Positioning|

We are now starting to see some things in the economy that we have never seen before: Last week, I mentioned some potentially widespread examples of wage declines in particular industries. I think in the past we may have had only a few industries here and there go through wage declines, so the overall wage picture was clearer in tight job markets.  But the advent of technology, globalization, price discovery and improved models of doing business have all contributed to downward pressure in wages (and even negative wage growth) in MANY industries.  So we have a heterogeneous wage picture in [...]

The Collapse of EDM7-FF Spread

May 14th, 2017|Positioning|

The big story on the curve last week was the collapse of the ED-FF spread.  I had been saying for a while now (as recently as the last CA) that EDM7-FF seemed strangely high to the rest of the ED-FF curve.  That finally capitulated last week, with EDM7 rallying 7.5bps, while FFN7 only rallied 1.5bps.  I updated the chart from the Trade Thoughts section last week to show the dramatic changes in the ED-FF spreads in the past week.  You can see that EDM7-FF declined 6.3bps on the week.  Now EDM7-FF looks a little too low on the curve, but [...]

ED-FF Spread

May 8th, 2017|Featured, Positioning|

[From time to time, I will post trade-related commentary from the web site.  The EDM7-FF spread collapsed the following week and this trade thought has resulted in one profitable trade and the second order effect of the ED-FF curve steepening has given us a an initial profit on a second trade.] One of the more interesting developments this year has been how the ED-FF spread has collapsed.  Take for example EDM7 vs FF.  It was over 35bps at one point this year, and it settled over 15bps lower on Friday.  I suppose considering we’ve had a yield-grab rally, it makes [...]

Z8-Z0 Flattening

April 30th, 2017|Positioning|

I sent out an email a week or two ago that showed Z8-Z0 locally peaking a few days before the FOMC meeting, and sure enough, we flattened strong on Friday afternoon.  Part of it may have been month-end.  The question then becomes, do we take out the low at 42?  There has been a strong flattening bias heading into the FOMC meetings, and soon thereafter. However, given the current shape of the curve, I would argue that this could be like swimming upstream.  Now I’m not saying we couldn’t flatten much more.  As you can see from the above chart, [...]

A Suspicious Pattern

March 26th, 2017|Positioning|

I’m trying to decide if last week’s post-FOMC rally was (1) a “reading comprehension fail” by the markets, (2) unbelievably aggressive positioning/expectations going in, (3) or something else.  “Something else” always makes me a little nervous.                                                                                                  - CA March 26, 2016 It is becoming clear that there is “something else” going on in the interest rate markets.  We have seen an increase in long positioning in the JPM client survey.  The top three candidates for the additional bullishness are: (1) pricing in of less fiscal stimulus than expected, (2) Article 50 next week, (3) French election positioning, or (4) [...]

Surge in Non-Quarterly FOMC Meetings

January 8th, 2017|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

December 25th, 2016|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

December 18th, 2016|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

December 11th, 2016|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

December 4th, 2016|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 [...]