Home Forums Main Forum Oh Canada (BAX)

  • Author
    Posts
  • Curve Advisor
    Keymaster
    Post count: 612
    #1516 |

    I’ll start moving some of the BA-related content into this thread in the next few days.

  • bambam
    Participant
    Post count: 24

    Hi,
    Are you still following BA’s?

    Im quite puzzled right now, the whole curve is drifting down, pricing hikes already? The economy has shown a little bit of a pick up, yet Poloz remains dovish, he even slashed down growth and exports in the last press conference. Inflation has been drifting upwards, yet still on the 2% target, and the conference showed no changes in the bank’s expectation of when this target will be met.

    BAX settle on CDOR rates.
    http://ca.reuters.com/finance/canadian-rates

    Corra is overnight rate.
    CDOR is pricing 40bps premium over CORRA right now as there are rumors about bankruptcies starting to kick in…but why is the back treating this a cycle? with further moves in the back..
    h7 is trading at 98.97.

    When CDOR on average has always been priced as (bank or canada rate)+ 15-25bp…

    How can the front be pricing fear of a crunch and a few months later keep pushing as if it was gonna be a hiking cycle?

    My logic is that the crunch rumor is just a rumor…and someone big is pricing a move in June by the FED which would drag Canada with it.

    yet there is so little to squeeze… m6-m7 is trading at 6 m7-m8 is trading at 10 so the m6-m7-m8 is at -4.

    Do you see any value on this curve?

  • Curve Advisor
    Keymaster
    Post count: 612

    I’ve recently been talking to a client who look at BAs, so I’ve been looking at it a little more often. Here’s a general thing to keep in mind – a flat curve is a very difficult one to trade. This is because you can flip from “leaning ease” to “leaning hike” in an instant. This could be okay if you have a strong directional view. However, this makes it difficult to say anything “smart” about the shape of the curve, since the move from zero is purely a function of direction. So I generally tend to stay away. This is why it’s good to be diversified and look at multiple things. You never *have to* trade any one market if it doesn’t look good.

    I don’t follow Canada very carefully. But here are some general thoughts:
    * Poloz may be dovish. But the data is not. The unemployment rate and inflation are showing signs of life.
    * Keep in mind that the BoC has an official inflation target. Oil looks to have stabilized (and rising), and they seem to have some kind of housing bubble (house prices +16% yoy). Maybe I’ve been reading too much Zerohedge on Vancouver house prices. 🙂
    * The natural shape of most curves is to be steeper in the long end. BAM6-M7 is 7. Sometimes, the removal of a possibility of an ease is enough to get the curve steeper. There is a chance of a hike in the spread, but part of it is just ease being taken out. If Poloz didn’t ease when oil was in the 20s, it’s hard to see him ease now.
    * The negative M6-7-8 fly is a nod to Poloz being dovish. You may know better than I if this is reasonable. But to me, -4 does not look “wrong”.
    * The CDOR spread to CORRA is really interesting. You see something similar with the ED-FF spread in the US. Lately, the spread has been widening. The markets seem to be expecting credit spreads to widen later this year. I’m not sure what the catalyst would be. So it’s not just a Canada thing. But it’s good to keep in the back of your mind (i.e. be careful about being long BAs vs cash). I’m wondering if it’s structural – a function of the large demand to receive fixed in swaps (the longer end swap spreads are negative). So as there is a large demand to receive fixed, there would be an equally large demand to pay floating.

    You don’t have to agree with everything I said, but I hope I gave you some food for thought.

  • Curve Advisor
    Keymaster
    Post count: 612

    BTW, ignore that last point about “wondering if it is structural”. I was just thinking aloud, and it wouldn’t explain the timing of libor spreads widening out. Some people seem to be speculating that the reason libor spreads are widening in many markets is that some money funds are leaving the commercial paper market. The effect could be more noticeable in the summer. I don’t keep on top of this, but am just passing along what I heard.

  • bambam
    Participant
    Post count: 24

    No need ignore that, the rumors might actually be true…
    I graphed commercial paper, bax and corra and it seems to be that they do widen when things aren’t great(in the past)…
    I don’t know what that might mean in the current setting. But they are widening…
    Chart 1 is 2006-2010
    Chart 2 is 2010-2016

    http://www.bankofcanada.ca/rates/interest-rates/canadian-interest-rates/

    Attachments:
    You must be logged in to view attached files.
  • Curve Advisor
    Keymaster
    Post count: 612

    Viewer Comment:

    Hey Joseph, glad to see you expanding the scope of the forum.

    Keep in mind that different countries are different beasts, canada is fifo not prorata, trading discounts without seats, half ticks only 4 first contracts. lots of liquidity is still done by locals, not large enough for real algos. liquidity is only real for reds and whites, among the locals you are a cowboy if you trade greens.
    3 months spreads are active, yet 6-9-12 are mostly ”hidden icebergs”.

    Margins are different as well if your legs touch the greens. ois market is otc, the FF equivalent contract is listed but with 0 open interest.

  • Garvit Omer
    Participant
    Post count: 5

    Hi,
    Can we expect more comprehensive articles about BAX curve, like ED?
    Thanks.

  • Curve Advisor
    Keymaster
    Post count: 612

    Many of the things I wrote about EDs can be applied to BAs. I look at BAs weekly, but I prefer concentrating on countries where you can trade the STIR futures past 2-3 years. There aren’t as many relative value things you can do with only 2-3 years of futures, other than perhaps 3mo and 6 mo spread and fly structures. Also, when a central bank acts meeting-to-meeting, it also makes trading highly data-dependent. If you have any specific questions, let me know.

  • bambam
    Participant
    Post count: 24

    It has been an interesting year, a lot of the movements seem to have been triggered by Wilkins instead of Poloz…or not.

    Here is a snapshot of some random days.

    BA1 BA2 BA3 BA4 BA5 BA6 BA7
    09/14/17 98.26 98.10 98.01 97.95 97.9 97.87 97.84
    10/03/17 98.365 98.185 98.075 98 97.95 97.90 97.86
    10/23/17 98.425 98.275 98.175 98.1 98.03 97.97 97.92
    10/31/17 98.535 98.385 98.26 98.175 98.11 98.06 97.91
    11/08/17 98.56 98.405 98.27 98.18 98.11 98.06 98.02
    11/17/17 98.57 98.41 98.265 98.16 98.08 98.02 97.97
    11/22/17 98.58 98.445 98.295 98.185 98.1 98.04 97.99
    11/27/17 98.58 98.45 98.305 98.2 98.12 98.06 98.01

    F1 F2 F3 F4
    09/14/17 0.065 0.025 0.015 0.02
    10/03/17 0.07 0.035 0.025 0
    10/23/17 0.05 0.025 0.005 0.01
    10/31/17 0.025 0.04 0.02 0.015
    11/08/17 0.02 0.045 0.02 0.02
    11/17/17 0.015 0.04 0.025 0.02
    11/22/17 -0.015 0.04 0.025 0.025

    Remember that BAs settle at 3m cdor
    CASH CDOR 11/23/17
    1m 1.3
    2m 1.35
    3m 1.402
    6m 1.598
    12m 1.794

    BoC hiked twice this year, and a the curve moved a lot. However, it seems that the market priced too much too fast.

    The U7 fly went crazy into maturity, i dont remember exactly where it settled but it went to trade over +15.

    What kind of reasoning do you guys see justifying the Z7 fly into negative territory?

    * Denotes a meeting with a press conference
    Months Meetings

    December 12/06/17
    January* 01/17/18
    February
    March 03/07/18
    April* 04/18/18
    May 05/30/18
    June
    July* 07/11/18
    August
    September 09/05/18
    October* 10/24/18
    November
    December 12/05/18

    Attachments:
    You must be logged in to view attached files.
  • bambam
    Participant
    Post count: 24

    Boy was that fun, hello vol.

    Friday was a very interesting day, 10bps moved down the curve. Giving the BoC an easy hike next week if they want it.
    At 6 we are still buying the front, going for cdor 1.41%(98.59) (that H8 buyer did at least 70k-90k contracts during last 2 weeks and pushed that front fly down.

    The front moved on the news ending the day at 1.47%, the H8 had a daily range of 10bps.
    A lot of volume traded today. An average day is 100-120k rountrips on the whole curve.
    look that the trading volume, is basically half the open interest.(Volume:381,765 OI:774,382)
    The front fly found wings and rallied from -2 in early morning to 2-3s on the afternoon, this movement was initiated by the massive beat of jobs(+79k jobs vs 10k estimate).
    There are plenty of signs of a tight market in Canada, it is not unfamiliar to hear of companies shutting down operations due to a lack of labor, but +79k..wow.

    There were no algos holding any bids today, we sold off hard. Even the donald- flynn news only stopped the flow for 1-2bps and then we kept selling as the effect(impeachment possibility) faded into background noise, selling an additional 4-5bps across the whites.

    It seems like the front fly has no curvature at this moment. Is a directional bet on the next hike, on no hike it will drop, on a rate hike it will go bid. You might as well just trade the outright. There is no turn adjustment on the chart, if you think there are same bps that should be adjusted on the bax curve please do comment.

    Boc on Wednesday, lets see how it develops.

    Attachments:
    You must be logged in to view attached files.
  • Garvit Omer
    Participant
    Post count: 5

    Why the back Spreads went offer, after H9 (ex: h9m9)? It is exactly similar to ED curve, where D8D9/D9D1 just keep on flattening!
    Will BoC also stop hiking after 3 more hikes?

  • Curve Advisor
    Keymaster
    Post count: 612

    Thanks for the new posts and color on Canada. I’e been a little busy with the holidays and new projects, but I’ll try to reply in a timelier manner. I don’t follow Canada as closely, but if you want particular feedback on anything (shape of curve, charts (put labels), etc) let me know. I think Canada is a little difficult to trade right now, since they are very data-dependent, and you need to have a strong directional view to trade the very front of the curve. The more interesting part of the curve is on the back end, as Garvit was asking. A similar thing is occurring in the US, where logically, if the US economy is doing better, and the US tax reform is going to increase the deficit, you would expect the longer end to sell off. However, we see the longer end flattening on selloffs. This can happen as more hikes are priced into the front end. However, in this environment, the flattening is more extreme because of the ECB and BOJ QE. I had written some essays on this on the web site. I also wrote something else this weekend, that will be posted in 2 weeks.

    I have been saying for a while now that if you have a bearish rates view, you are better off sticking to the very front of the curve (2018). Or you can convert a spread to a fly (where you sell spreads behind the spreads you want to be long). It’s not that the BOC couldn’t hike more than 3 times – it’s more that Canadian tens look attractive when compared to 0.30% in ten year bunds and 0.04% in ten year JGBs. So you can’t trade the long end of Canada (or the US) in a vacuum.

  • bambam
    Participant
    Post count: 24

    I dont know if the BoC will stop hiking after 3 hikes. One thing to keep in mind as that H9 and beyond, the open interest is smaller so it isn’t hard for spreads to move, one guy with a few to do can definitely move things around.

    I think it is an interesting structure to pick your spots and roll, keeping in mind that the open interest in the back should increase as the Z7 goes off the board, time will tell.

  • Garvit Omer
    Participant
    Post count: 5

    Thanks for the insight.
    Trading in Dec17 after CDOR fixing seems very strange to me, before fixing came it was trading at 98.51, and spot CDOR was 98.58 (100-1.42), no of days till expiry was 11. So, market was pricing .63 bps per day increase.
    Then CDOR came 1.4 bps. So I was expecting it to sell off (i.e. 98.505 or less). But it went UP to 98.525!!!
    Any reason or explanations?Is this type of move very common?
    (As I have hardly seen this type of move in ED)

  • Curve Advisor
    Keymaster
    Post count: 612

    BamBam: I have no strong view on when the BOC will hike. I was just saying that considering we are in a yield-grab environment in the long end, we should “consider” buying a fly around hikes in 2019 and beyond, rather than year spreads. Of course, it all depends on the level of the front spread you want to buy and the value of the spread you want to sell.

    Garvit: In general, I think all the fixings can be noisy in December. Especially if it goes over year-end. But yesterday, didn’t CDOR fix 1.434, which is +0.014 on the day? Since that is a negligible change, I think that’s why we rallied. I don’t look at the fixings regularly, but that’s what one of my colleagues told me.

  • Garvit Omer
    Participant
    Post count: 5

    Sorry, it was ‘up by 1.4 bps’ rather than ‘1.4 bps’.
    Seeing today’s fixing (+.2 bps), I think that must be noise. As you rightly said!
    Thanks.

    • bambam
      Participant
      Post count: 24

      it is very interesting that we are flattening on selloffs, however i do wonder if its because of the long end hunt for yield. I totally agree with you that nothing trades on a vaccum jpy eur usd.

      the open interest is minimal in the back.
      Contract OI
      U9 22k
      Z9 9.5k
      H0 3.1k
      M0 2.6k
      U0 .4k

      2yrBond 0
      5yrbond 4.2k
      10yrbond 500k

      I like to slowly pick up the back just as a “roll” given the current curve structure. What kind of fly do you have in mind in the back 3m, 6m, 12m? Doing it on 3M flies betting on decay/roll through he very back end can take a good while.

      If we just roll, and the structure holds (if market is pricing too much too fast, and we just move hikes further back, then as we roll, the spreads will be bid.) And if a change of regime(structure doesnt hold-we flatten a lot) was to kick in-very unlikely- it would easy to fly the 3m spread near 0, and on roll you are very likely to scratch. it would be a margin dead weight for a while.

    • Curve Advisor
      Keymaster
      Post count: 612

      Sorry. I had a brain cramp. I suppose a 1.4bp move could be large or small – it really depends on what happened the previous 24 hours. For example, if the Dec meeting increased 2bps the previous day, then a 1.4bp rise could be considered a decrease. This is because the 3mo libor rate is a spread function over the hike probabilities. Assuming the CDOR fixing goes +2 days like the other libor fixings, that could also mean more volatility on Thursdays, since the fixing then goes over a weekend.

  • bambam
    Participant
    Post count: 24

    The Z7 bid yesterday and today isnt surprising. Remember that we sold off hard on the jobs number and CDOR only moved a 1.4bps(vs 5bps that Z7 moved).

    ————–
    How many points are you guys “pricing” inside CDOR at 1.434?

    on the front end, i like the H8 3mFly at 5.5-6 as short candidate.
    Z7/Z8 steepened 10bps since friday.

    on a no hike tomorrow, i think the H8 should sell off and on a rate hike i think it doesn’t move that much up.

    There is so much priced in, that it makes me go hmmm.
    imo, if the BoC hikes tomorrow, it would be letting the bax strip dictate its policy.
    During the financial system review we heard “household vulnerabilities”
    OSFI rules are kicking in next january, inflation is no where to be seen and housing markets are cooling. BoC said we are removing stimulus, not tightening.

    Why the rush in the curve?

  • Curve Advisor
    Keymaster
    Post count: 612

    BAX right now is hard to trade without a view, and I currently don’t have one. Nothing looks like a screaming buy or sell right now, without a view. The one interesting thing we saw the past two weeks on the US curve is large EDZ8-M8 calendar spread buying, only to have to go the other way last week. The flattening bias is going to be strong, with lower inflation the past few weeks in Japan, the EU and now China. I think as the curve continues to flatten, a subset of the market could take the flattening as a sign of an impending recession. So this makes 2019 hikes a little dicey.

  • bambam
    Participant
    Post count: 24

    This week the flattening bias arrived but just in the back (H9 and beyond) while Z7/Z8 is now 60-61..

    The flattening bias is going to be strong, with lower inflation the past few weeks in Japan, the EU and now China. I think as the curve continues to flatten, a subset of the market could take the flattening as a sign of an impending recession. So this makes 2019 hikes a little dicey.

    Poloz spoke yesterday, saying that higher rates in the future are likely, yet expressing that the fed and the boc cycles arent in sync. According to Poloz the BoC is 2 years behind.

    H8 Fly is trading 8s now when 4s went offered earlier this week.

    offer 3m flies
    Z7F -.015
    H8F .0888
    M8F .035
    U8F .04

  • Curve Advisor
    Keymaster
    Post count: 612

    When I mentioned the flattening, I was mostly referring to 2019 and beyond (as per the quote). 2018 is just going to converge faster to the BOC policy rates, so they will be more affected by the data and policy bias. Last week, the US, UK and Canadian long end all flattened noticeably. Those countries all happen to be higher yielding than say the EU and Japan.

  • bambam
    Participant
    Post count: 24

    So we rolled,

    H8 is now BAX1 and last we spoke what now is F1 was F2.
    BoC didn’t raise rates in December waiting for the fed to move forward, the fed remained steady with a hike that was 98% priced into the meeting.

    Since then we had an amazing jobs number, and today we read confidence across the headlines.

    Results of the Winter 2017–18 Survey | Vol. 14.4 | January 8, 2018
    “Business sentiment in the winter Business Outlook Survey remains positive: the sales outlook is still healthy, despite some moderation. At the same time, capacity and labour pressures are becoming more apparent and are stimulating firms’ employment and investment plans.”

    Lets say there is a hike coming, it would be surprising not to see a hike.

    And the 3m flies are like this:

    F1 .065
    F2 .03
    F3 .035
    F4 .025
    F5 .01
    F6 .01

    Before the December meeting, the F2 fly (what is now F1 H83mfly(+H8-2M8+Z8) was trading 4s-5s.

    So I wonder, what positions are best suited to go with the assumption that BoC will raise rates on January 17.

    As you mentioned before

    “This is because the 3mo libor rate is a spread function over the hike probabilities.”

    H8 Contract Expires on March 19th and there are two meetings to go Jan17 and Mar7.

    H8 today settled at 98.17. So By March 19th the market is expecting 3m cash quote to be 1.83%.

    How many hikes are priced into that 1.83 already?

    The whites look like this right now (aprox Open Interest)
    98.17 H8 184k
    98.97 M8 140k
    98.835 U8 117k
    98.725 Z8 126k

    98.65 H9 65k
    98.60 M9 51k

    “Say you have a butterfly with legs a-b-c. As more of Jan 16 to Dec 17 is included in leg b-c, the more negative the butterfly will become. Eventually, you will get to the point where 100% of spread b-c includes hikes, while 0% of spread a-b includes hikes. That is where the lowest fly point will occur. Conversely, the highest fly point will be where 100% of spread a-b has hikes priced in, while 0% of spread b-c has hikes priced in.
    However, we have no idea when the FOMC will start hiking, when they will stop, and in what increments they will hike. But if you picture the basic “complete knowledge” example in the previous paragraphs and assign a probability distribution to the various scenarios, you can start to see how we can get areas of negative and positive curvature.”

    Using the quoted logic, and knowing that the meeting schedule this year looks like this, how do you “price” files under different scenarios.
    1-Hike and hints at more hikes soon- likely
    2-Hike and see how data develops- very likely
    3- Hike and done-very unlikely
    4- Not Hike and hint at hikes soon- unlikely
    5- Not Hike and hint at hikes later- very unlikely
    6- Not Hike and hint at no future hikes- very unlikely
    January* 01/17/18
    February
    March 03/07/18
    April* 04/18/18
    May 05/30/18
    June
    July* 07/11/18
    August
    September 09/05/18
    October* 10/24/18
    November
    December 12/05/18

You must be logged in to reply to this topic.