Bond rally nearing an end?

Daddyeaux,

Agreed on the moves nowadays, nothing compared to the 1980's, which I wish I was part of from the standpoint of a local trader. Now it is more or less a game of chess and positioning around the big players like PIMCO and various bank prop desks, too much liquidity at this point for HUGE locals to push the market for an extended period of time.
 
them waz the days where you could short the 30 year into a refunding and cover at noon the day of the auction.

the "after funding rally" was like finding money on the sidewalk 4 times a year...worked for years and many who put on the trade were handed 20 to 40 ticks each auction
 
The strangles used by PIMCO are separate from their curve steepening play in the futures. Strangles are done in the options market, essentially picking two strikes to sell around the current strike. For instance, PIMCO is selling the Sep 103-108 strangle in the 10yr right now, selling both the 103 puts and 108 calls. As long as we expire between the two strikes both options expire worthless and they collect all the premium. They often leg these strangles, like clockwork, selling calls on rallies (they have sold boatloads of Dec 10yr calls this past week) and selling puts as we break (sold tons of Sep 102 and 103 puts when we broke into contract lows last week). In layman's terms, look at PIMCO as the seller of insurance in the options market, all they do is sell options, never buy them.
 
Some exerpts from Man Financial (Lara Akin)credit market research note from Wed:

"Friday is option expiration in the June 10yr ... When we look at the open interest for a guide to Friday's closing price, we notice that the greatest levels are in the 105 puts, with just over 162k in open interest. The next largest number is the 104 puts, which must have looked like a good idea last week. On the call side, the 106 calls have OI running at about 131k. The overall distribution of open interest in the June 10yr contracts suggests the note will try to pull lower into the end of the week. A strong GDP revision on Thursday is the only macro number that is likely to support that downturn."

"This rally in the notes has not been confirmed by higher open interest, which suggests a general lack of enthusiasm for higher prices ..."

She sounds a bit more ambivalent about the current rally than I am ...

Interested in informed views on the usefullness of an options perspective over Thurs-Fri.

Mcurto/Riskarb- do the floor traders or institutions target option levels, i.e. should we expect a pull to 105 or 106 levels over Thu/Fri? Interested in thoughts ...
 
Most institutions have been heavy sellers of the June 106 calls the whole week in the pit and on the screen, especially as they were bid above 10 ticks earlier in the week. There is only a slight difference in the amount of puts and calls at the 106 strike (about 16,000) so it is probably not enough to pull things too far away from the strike. On the other hand, we have yet to settle the futures above 106 this week and any move above has been met by quick and heavy selling, so obviously this level is being defended by some of the big players since they are short so many of the calls.
 
Quote from mcurto:

Most institutions have been heavy sellers of the June 106 calls the whole week in the pit and on the screen, especially as they were bid above 10 ticks earlier in the week. There is only a slight difference in the amount of puts and calls at the 106 strike (about 16,000) so it is probably not enough to pull things too far away from the strike. On the other hand, we have yet to settle the futures above 106 this week and any move above has been met by quick and heavy selling, so obviously this level is being defended by some of the big players since they are short so many of the calls.
More...

Thks ...
 
NY Fed. speak from earlier this year...interesting...


"The net credit exposures in OTC derivatives, after accounting for collateral, are a small fraction of the gross notional values. The ten largest U.S. bank holding companies, for example, report about $600 billion of potential credit exposure from their entire derivatives positions, the total gross notional values of which are about $95 trillion. This "credit equivalent amount" is approximately 175 percent of tier-one capital, about 15 percent higher relative to capital than five years ago. This measure of the underlying credit exposure in OTC derivatives positions is roughly a fifth of the aggregate total credit exposure of the largest bank holding companies. This is a relatively conservative measure of the credit risk in total derivatives positions, but, for credit derivatives and some other instruments, it still may not adequately capture the scale of losses in the event of default in the underlying credits or the consequences of a prolonged disruption to market liquidity. The complexity of many new instruments and the relative immaturity of the various approaches used to measure the risks in those exposures magnify the uncertainty involved."
 
The credit-derivatives market now is considerably larger than the market for cash bonds, and that makes it much easier to alter positions or transfer risk in such issues. "That's one of the reasons we have seen such [market] stability," Mr. Kauffmann says. "And it's one of the reasons we might be looking at permanently tighter spreads."

From todays WSJ credit markets column. I think that people are confused about derivatives - they ONLY transfer risk, not eliminate it! Eventually there will be a credit quality downturn, and then we will see what happens to 'permanently tighter spreads'.
 
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