Curve AdvisorKeymasterSeptember 18, 2017 at 4:16 amPost count: 612
Earlier this month, I started sending daily email thoughts to newsletter subscribers on anything in the markets that I think is interesting. I may discuss news, economic data, the calendar, flows, trades that go through, updates on CA trades, updates on microvalue on the curve, etc – pretty much anything I find interesting that day that relates to STIR futures trading. Below are the emails I’ve sent out so far. I am not intending to update this thread, but I thought it might be interesting for you to see what sorts of things I think about on a day-to-day basis. I think this is a good representation of things I like to look at, with the exception of discussing large options flows that may go through, and some discussion of upcoming data.
Email sent on Sept 15, 2017 [daily thoughts 170915]:
I had been saying for some time that the ev of North Korea on rates are small. But even I was surprised that fixed income had little reaction (and eventually sold off) on the missile test. I guess you could call it “the boy who cried wolf” (we’ve seen it before, so we ignore it after a while). I prefer to think of it as a poker analogy – “when you are weak, you act strong. and vice versa.” If North Korea is trying to get handouts, they need people to sit with them. The US had not been very receptive. So I suppose you go after Japan. In any event, if we are not worried about N Korea, I’m not sure we get that weekend buying I mentioned yesterday.
The second surprise was the market’s reaction to the data. The data was weak all-around. It seems like we are just attributing the weakness to the weather. Even with the weather, the data looked a little weak. Also, weaker near-term data could put the Fed on hold in the near-term. I suppose this explains why the first three whites are unchanged while the greens are down 2.5bps. But we had overrallied before. I have no strong directional views from here – we are data-dependent, but the data is going to be muddled from the weather.
I’m a little incredulous that EDZ9Z0 spread is one of the lowest on the curve. But I suppose this makes it that much more attractive. I’m going to have EDZ9Z0 spread be Trade G26. I think with the Fed tapering, the ECB potentially tapering, the BOE sounding more hawkish, we could get a reprice of the long end. Let’s buy 2 of 8 units @ 15, and another 2 units @ 15 with a tic (up to 15.5). I’m guessing the long end flattening could be a play on the Fed’s longer run dots coming in. I’m just not sure they are going to come in *that* much. The hawks are probably still hawkish.
As for the ED-FF curve, I’m still a little surprised that EDV7-FF and EDX7-FF are both below EDU7-FF. I think there should be a little for the year-end turn (which both EDV7 and EDX7 go over), and the ED-FF curve has been steepening noticeably this week. So I continue to see value there. If you have the Flip Trade with EDU7-EDV7 vs FF, you will need some hedge to protect against libor coming in lower when EDU7 rolls off Monday. You can hold some EDV7-FF outright, and/or you can buy EDH8-FFJ8 @ -19.5 (or so), perhaps in a 2:1 ratio of EDV7-FF to EDH8-FF.
Have a good weekend.
Email sent on Sept 14, 2017 [daily thoughts 170914]:
Apparently, we were a hundredths away from printing 0.3 on core CPI mom. That still only gets us to 1.7% yoy. There was some gas noise, so I think this will be the start of muddled data for the next two months or so. We get another piece of potentially-noisy data tomorrow. I have no idea what is priced in for Retail Sales. All other things being equal, I do think we could get a little rally going into the weekend. Not that N Korea is that big a deal – just that people may want some ammo to sell again. But this is just a 55-45% punting view, so take with a grain of salt.
As for the curve move today, usually inflation results in a bear flattener, so today’s move makes sense with the slightly higher CPI. I suppose a hawkish Carney saying we could get limited hikes added to that. I am starting to like buying steepeners further out (like EDM2-M3 spread). I just want to see if we get a little more of a dip.
Libor rose another 0.11bps, but considering we went over the weekend on the fixing (so this change covered 3 days), it was smaller than expected. There are only 2 fixings days left. EDU7-Z7 vs FFs (i.e. Trade G25) has resuscitated, but I think this could move a little more. EDU7-V7 vs FF is still about -0.3bps. I still think EDV7 is rich to the curve. It’s just to take a short position on EDV7-FF (when EDU7 rolls off), you probably want to be long some ED-FF spread further out (like maybe EDH8-FFJ8).
I’m surprised that EDU7 6mo fly is 8 (again). I suppose the Dec meeting is going to be volatile and we did get some inflation (and a Dec hike). But I continue to prefer the 2018 meetings, and think they look cheap – especially relative to the 2019 meetings. I guess we’ll see how the 2017 hike dots pan out next week – my current over/under is that 40% of the FOMC will see no hike this year and the rest will see a hike. But keep in mind we have a lot of hawks that I don’t think carry much weight.
Email sent on Sept 13, 2017 [daily thoughts 170913]:
I suppose since the 3yr and 10yr auctions went poorly, the markets may be pricing in another poor auction (30yr) later today. Gundlach saying bunds are too rich and the the “tax reform by year-end” banter isn’t helping. So I would have originally suggested scaling out of a small amount of the EDZ7 and EDH8 1yr single and double flies. But I think these could go higher. I suppose if you thought CPI or Retail sales could come in weaker, you should sell some.
Libor was fractionally higher again today, and FFF8 is under 20K contracts, so I think the FFF8 guy is done (for now). I have no new thoughts on the ED-FF trades. I’ll send out a more detailed ED-FF plan after CPI tomorrow.
If you want a bullish fly hedge for things like EDZ9 one year fly, I like selling small EDZ8 1yr fly @ 2, to get like a 1:4+ ratio. But again, I am still bearish (at least going into the tapering) so I am not going to officially do anything.
Email sent on Sept 12, 2017 [daily thoughts 170912]:
As mentioned yesterday, this is the move that probably hurt the most number of active traders – fixed income selloff and equity rally, since there was probably a lot of defensive positioning earlier in the month by portfolio managers. The pattern with fixed income the whole year has been that we sell off big for a few days and then everyone goes into “buy the dip” mode for literally months. I’m not sure when this stops, but it seems to me that if I was bullish, I would probably wait until around the Fed taper is announced next week (just to see if we get some better dip to buy). But that is just me.
In any event, if we keep selling off, my inclination would probably be to lighten up on taper/reflation trades going into the meeting, and look to add again afterwards. I think the markets have been so used to buying on dips and making money that it would take a little time for them to realize the dynamic will be different without the Fed QE tailwind behind them. So we should make some room to add afterwards.
Libor rose again today (+0.25bps to 1.31917). I think the narrative that near-term libor-FF will decline because the debt/budget discussion got pushed back is not commensurate with this move. I had thought the bigger factor was the Fed tapering. I see libor-FF having moved out to the 3 mo highs today, and it’s not because of the selloff – in terms of rates, yields are still fairly low. Our FFF8 buddy seems to be in semi-hiding today, as FFF8 only traded 44K contracts today. It’s not clear if this was some protection trade going into CPI – I think inflation has the most potential to jack up short term rates. Of course, we have to get some first. With FFF8 being relatively tame, ED-FF moved about about 1bp on the curve. I would expect this relative move to continue, since EDU7-Z7 vs FF is still very flat.
If you feel like you missed the selloff and like the continued growth story, consider buying EDZ7 1 yr fly (single of double fly) or buying EDH8 1 yr fly (single of double fly). These have not participated (and are moving the wrong way today), but easily could catch up.
Email sent on Sept 11, 2017 [daily thoughts 170911]:
The weekend of worry didn’t amount to much. North Korea hasn’t gone away, but the potential of leveling of Florida by Irma and Jose are pretty much gone. So it’s reasonable that we took back most of last week’s rally. I also think a lot of investors have been rotating out of equities into fixed income (especially going into last weekend and this “7” year), so this move probably hurts the most active traders.
The libor fixing was shockingly +0.634bps today (to 1.31667). I did think libor could be sticky, but I it was a little surprising libor rose as much as it did. So now it is extremely perplexing that EDZ7-FF is about 0.6bps below where the libor-FF spread is, despite the fact that EDZ7 contains a turn, and also should have a little premium for the fact that EDZ7 settles after the Fed meeting and the debt/budget deadline. I think the most likely culprit is our FFF8 buddy, who seems to be at it again. FFF8 has traded 59K contracts so far today. It’s a little hard to say what he is doing, since the OI hasn’t changed much. In any event, he seems to be doing most of his aggressive selling during London hours and the settle (small sample), so let’s see if there is an opportunity to job something over the entire 23 hours the market is open.
In any event, this let us get filled on Trade G25 @ 1.25. I’ll also do 2 units here @ 1 and another 2 units @ 0.75. I just feel that with tapering coming and the debt/budget before the contract settle, this isn’t going to get that much lower. I think at the end of the week, we’ll need to consider buying some EDV7-FF to replace the EDU7 that will roll off, but let’s see what looks good at the end of the week. Or maybe this will be profitable by then. [fingers crossed]
Email sent on Sept 8, 2017 [daily thoughts 170908]:
Dudley is starting to sound a bit confused. He seems to like further hikes but thinks lower inflation may be structural. In any event, you can probably count him as another FOMC member whose long run FF dot will be lower. This makes for an interesting Fed meeting in that they will be tapering, but the dots will be lower.
Irma was downgraded to a category 4, so I think we can rule out a piece of the “catastrophic” tail. Things can change, but part of the “worry and dovish Fed” rally released post-Dudley. Now we have an alleged North Korea missile test to look forward to tomorrow, and the Irma landfall on Sunday.
Our FFF8 friend is here for a third day in a row (68K contracts traded today). It’s hard to see what’s going on, because the OI has barely changed (increased). The relative FFF8 selling is driving EDZ7-FFF8 down to -16. This was aided by a large 0.69bp drop in 3mo libor (which dragged the front of the whites higher). I see cash libor-FF being at the level of the previous 3+ weeks, so it’ll be interesting to see if libor fixes lower again Monday, or is unchanged. EDU7 is currently pricing about 1.1bps lower libor in the next three weeks. I think the fixing Monday will be telling.
Have a good weekend.
Email sent on Sept 7, 2017 [daily thoughts 170907]:
I didn’t have any strong thoughts on Draghi. He mentioned FX, but didn’t make a big deal about it. And I’m not sure what “decisions” will be made by the next meeting (he mentioned October), but from the bund rally, it appears the markets were expecting something a little firmer.
The more interesting price action is with US Treasuries. Apparently, tens have been failing in repo the past few days. This is why the Fed needs to taper, so this makes a taper more likely on the margin. So the repo fails may have contributed to the squeeze today. We also have Irma, North Korea is allegedly firing a missle this Saturday, and I suppose we still have the debt ceiling and budget. All we did was just postpone the debt/budget a “few” months.
I read somewhere that with the postponement to Dec 15, that is not when the US govt would run out of money. If the Treasury can squirrel away enough money in the next three months, they can postpone default until early next year. I have no idea – just passing along something I thought was interesting. So there could be some timing plays, where default is moved from Dec to H1 2018.
The “unlikley hike in Dec” because of the budget postponement to Dec 15 story seems to be continuing. EDZ7 has (relatively) led the rally the past two days. The key benchmark I am looking at is EDU7-Z7-H8 fly around 0 as a “fair” level. That is, I’ll probably hold onto any trades long the Dec meeting until that three month fly gets closer to 0 (currently ~2, from >5 yesterday).
An interesting related market development to note is that large market participant likes selling FFF8 (98K traded yesterday, and 66K traded today). Apparently, they didn’t get the Dec 15 memo making a hike unlikely. As a result, EDZ7-FFF8 went from -19bps to -17bps the past two days. -17 is very low, and one of the reasons EDU7-EDV7 vs FF is 0 offered. You can also consider selling EDZ7 vs FFF8, vs some protection from the libor fixings going lower (like buying EDU7 on a dip). Get some on while you can.
Email sent on Sept 6, 2017 [daily thoughts 170906 Part II]:
We are just chock full of news today.
* That bipartisan debt/budget/relief bill caused a bit of a selloff. but you may have noticed that EDZ7 did not participate, and instead rallied. I’m not sure if you noticed the dates, but that deal extended out to Dec 15. The Fed meeting is Dec 13. Assuming the negotiations go on as most do… until the last minute, this would make it more difficult for the Fed to hike, knowing that in two days, the Fed could default, or the government be shut down. So I would expect the Dec meeting to continue noticeably underperforming relative to the meetings after it. You may have noticed that FFF8-G8 spread widened fractionally (probably someone playing for a Jan hike). But I would expect the March meeting to start getting noticeably more priced (as Dec was). This is because I suspect there is an algo or something that puts on trades with a flattening bias, selling particular white EDs at the end of the day. Maybe I’ll write about it this weekend, even though it’s just speculation.
* There were headlines suggesting that Trump is not going to nominate Cohn as the new Fed chair. I also heard an analyst suggest Yellen doesn’t want the job (I don’t know). In any event, this leaves the door open for a less dovish candidate (although I would think Trump would want low rates).
For the Flippers out there, I really like that EDU7-V7 vs FFs, that I wrote about this weekend. It looks doable close to 0.
Email sent on Sept 6, 2017 [daily thoughts 170906]:
As promised, enclosed is the inaugural daily thoughts email – I have a lot of market thoughts during the day, but usually I just pick the major ones for the weekend CA. This one is longer than most, since we had a lot of news today.
In retrospect, when I put out a piece over the weekend that says that the 30yr rate is going to be theoretically capped by long run FF rates, unless there is a term premium put back in (and we know there has been none for a loong time, AND we already have other reflation trades), then the clear trade was to buy the 30 year bond. That would have worked well yesterday. Sigh.
I see the rally this week being a function of four things:
1) Dovish Fedspeak. Clearly Brainard and Kashkari are also lowering their dots.
2) Irma. “Manageable” hurricanes like Harvey could be constructive for long run growth (although there has been some wealth destruction). Irma could be “crippling” if GDP potential is destroyed.
3) N Korea. The markets don’t seem to care that much, since most of the N Korea news was out, and we had only rallied a few bps on Monday.
4) Other people in the markets looking at the 30 year treasury rate and saying, “I don’t see the Fed ever getting to that rate.”
Some market minutae I found interesting:
* the libor fixing was unchanged this morning, which is a little unusual considering the large rally yesterday. I now see libor-FF being around 16bps, which is a little higher than the 15.5bp average of the past 2+ weeks. This spread has been widening for a few months. It should be interesting to see if this changes, now that a debt deal seems to be closer and Fed tapering is coming closer. I still like EDU7-EDV7 spread to widen further vs FF.
* I have no view on the ECB tomorrow. A lot of people seem to expect FX jawboning. I think Draghi may mention it as a factor to consider, but it seems a little “unprofessional” to actively try and talk down one’s FX. It’ll be interesting to see if Draghi is as dovish as the markets expect. On average this year, the central bankers have been a little more hawkish than I thought… the Fed hiking March, the Fed starting tapering, Draghi not mentioning FX at Jackson Hole and Poloz hiking today.
* Fischer resigning was a little surprising, but I suppose he was getting pretty old. He was a centrist, so I don’t know his departure makes much of a difference, other than giving Trump another seat to fill (earlier – now instead of next spring when his term was up). He’s going to ride off into the sunset, presumably after the taper later this month.
* I was shocked that the JPM client survey has ZERO longs in the last two weeks for active clients, and only 7 longs the last two weeks for all clients. There seem to be a lot of people on the sidelines. This reminds me of the ETFs jacking up equity valuations, which results in lots of people thinking the markets are rich, sitting on the sidelines, and waiting for a noticeable dip. Is the same thing happening in fixed income?
* FFV7 is 98.845/85. Considering the fair value of FFV7 (two month-end days) is closer to 98.846, the markets are pricing in a larger chance of an ease than a hike (albeit fractionally). So make sure you have some ease protection in your book.
* It is interesting that the Z8Z9 year spread is the lowest on the board (currently 14.5). The markets basically do not believe the extended recovery with a gradual Fed story. Earlier in the year, I suggested I didn’t like 2019 hikes, but even I did not expect this spread to get this low. It could be an eventual recession play, but I have no clarity on this. I’m not a believer of the “this business cycle is too long, so it should end soon” theory.
We had a lot of things occur today, so this is longer than ususal. Let me know if you like this format – if there is anything else you would like to see.
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