Bond rally nearing an end?
- Thread starter gharghur2
- Start date
Riskarb,
So this is a play that the movements in the NOB spread will become more normalized (i.e. that we flatten the NOB in an uptrade and steepen it in a downtrade)? The NOB spread has flattened a pretty good deal in the whole down move of 2006, rather than steepening as most would think in a normal sell-off. The timing somewhat coincides with the second 30yr auction in August (this position expires toward the end of August). Will be interesting to see how it plays out. I think he might have more to do yet, it is possibly Espen's JPM FICC group out of New York City (these same guys put on some strange put and call 1x2 bets that were essentially short straddles and long guts and they played the 10yr perfectly as it pinned the 111 strike 3 expirations in a row in early 2005). Fun stuff.
So this is a play that the movements in the NOB spread will become more normalized (i.e. that we flatten the NOB in an uptrade and steepen it in a downtrade)? The NOB spread has flattened a pretty good deal in the whole down move of 2006, rather than steepening as most would think in a normal sell-off. The timing somewhat coincides with the second 30yr auction in August (this position expires toward the end of August). Will be interesting to see how it plays out. I think he might have more to do yet, it is possibly Espen's JPM FICC group out of New York City (these same guys put on some strange put and call 1x2 bets that were essentially short straddles and long guts and they played the 10yr perfectly as it pinned the 111 strike 3 expirations in a row in early 2005). Fun stuff.
Haug? Doesn't suprise me. He loves to put on these huge vanilla trades with small exposures. You're correct in your assessment of the trade; long goes flat, short goes steep. It flips modalities as mentioned, but behaves like a short gamma backspread past 2sigma which hurts PnL substantially. There are better alternatives; long NOB/short call ladders in TY. The problems lie in the -gammas accumulated and convergence risk [gamma risk prior to expiration at the strikes]. I dunno, the more I look at it the less I like it. His book on models is good.
It's a bit obvious to make the combo premium-neutral. In summary; short the vol-box at 380bp and short correlation. Problem is the additional 7000 short TYs to compensate for the large basis risk on the implied-differential.
I would like to add a couple more items to the list: industrial and price data coming from Europe this week. The last time the dollar was in a similar situation was in December 2004 when it finally bounced on disappointing inflation and growth statistics from Germany and France.
Yes, Central banks want to sell dollars but to buy what instead, cacahuetes? We learned today that industrial production in Germany was -2.6% in March while +0.5% was expected. If today's data combined with tomorrow's data on French industrial production and German inflation depicts the same situation again, the dollar will rebound like it did in December 2004 for lack of better alternative.
We focus on the numerator and tend to forget about the denominator.
Established long position on 30 Yr's, so I'm in too.