Bond rally nearing an end?

Quote from Kicking:

What THE HELL is going on in the bond market ? !

I am short some Dec TLT calls and they have doubled on me, thank god I saw a move coming and reduced the position on Monday

can someone explain what the convexity buyers exacty are and the relationship with mortgages ?
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Are usually mortgage companies trying to hedge their exposure to their portfolios by buying bonds that have higher convexity. If you don't know what duration or convexity is, at least the basics, I would highly recommend learning them before trading any securities in the FI space. Mortgages have low convexity and are not doing as well given the bull market in bonds right now, thus the mortgages companies need to hedge this poor performance by buying high-convexity stuff, higher volatility, longer maturity and lower coupon...

Hope that helps...
 
well I know they hedge mortgage refi exposure by going into the bond market but how the hedge actually works and why such a big move is what I am interested to understand, hopefully there is not something bigger going on I am not seeing,

such as big trouble in equities coming and flight to quality starting
 
Quote from Kicking:

well I know they hedge mortgage refi exposure by going into the bond market but how the hedge actually works and why such a big move is what I am interested to understand, hopefully there is not something bigger going on I am not seeing,

such as big trouble in equities coming and flight to quality starting
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Ya the details are a little more complicated of course... Buying begets more buying in a convexity play...
 
Quote from Kicking:

What THE HELL is going on in the bond market ? !

I am short some Dec TLT calls and they have doubled on me, thank god I saw a move coming and reduced the position on Monday

can someone explain what the convexity buyers exacty are and the relationship with mortgages ?
More...

I've been wanting to go short since 108 and change. I've done consistently well as a day trader by quickly leaving the bias behind when price action indicates I'm wrong. Generally speaking a break through the highs of a rectangular period of consolidation indicate we may go higher. We've had that warning many many times since 108 and change. Heck, since 107 and change. If we keep spiking through weekly highs as far back as the eye can see no matter how much I want to be short for a position trade, I can't.
 
It seemed like the rally (post-FOMC) was more short-covering than real money accounts extending durations. I am curious to know if implied vols moved up as funds got caught short too many deltas. The volume early on Friday was massive in cash bonds and 3mo libor, which seemed to imply the London/Carribean funds were very active.

Also, I read where Amaranth had to sell a couple of billion dollars of leveraged loans to make its margin calls. Sure the lev loan market is currently liquid – it’s because hedge funds are active in the market. But if numerous funds start selling this type of collateral and dealers are the only buyers left, it will get very ugly. It will also ripple across CDOs, EM bonds, CDS, and treasuries. The Fed is not going to cut the funds rate because of spreads blowing out (they never have in the past), they will wait for the decline in gdp growth/price deflators to start easing. There has recently been a chasm between the real economy and financial economy – it will soon be the size of the Grand Canyon.
 
the junk credits get little press nowadays since junk gets refi'd into rejunk as boomers chase yield into retirement to buy golf balls.......................

the fuse gets lit on that end just as in the '80s
 
Talk of mortgage convexity buying again in 10yr and some swap receiving. Also saw on wires purchase of 25,000 10yr futures. I watch the book every second and didn't see that many trade. I think the convex buying was in cash and futures guys just turned off autospreads and the bid got crazy, nowhere to lay it off. Wells Fargo rolling Dec 109 and 110 calls into March 110 and 111, about 5,000 so far, 70,000 more to go . . . .
 
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