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Bond rally nearing an end?
- Thread starter gharghur2
- Start date
Quote from mcurto:
I think the bond market sees a stable policy (the Fed leaving rates alone during a transitionary period from either a rate hike or rate cut cycle) as a final push to contract risk premiums (flatten the yield curve or flatten/narrow any spread product such as Swaps, Agencies, etc.). These final gasps of risk premium contractions seem to be followed by a little chop in inversion for a few months, then a signal to monetary policy change, and then very quick and violent risk premium expansion (yield curve steepening, spread product widening, all hell breaking loose as long-term trades are unwound and even reversed into steepeners). This is probably several months or maybe even a year down the road, depending on how near we are to the end of the rate hike cycle.
I think you're right.
Most of the action on the short end of the curve to come.
I also wouldn't underestimate the tendency of the Fed to overshoot during their hike/cut cycles. Looking at what is priced in to the market (and dealers are watching this closely for opportunities) in Eurodollars/Fed Funds, no one is discounting that the Fed may overshoot to 5.25% or 5.50%. At this point getting long Sep euros seems relatively futile (unless you think 4.75% is end point) in terms of risk/reward. Same with going long the 2-year note at 4.60% right here ahead of auctions and the Treasury refunding along with more Fed meetings. I'm not necessarily saying the Fed must go to 5.50%, but am looking at that as the trading opportunity that no one has priced in yet and possibly the best risk/reward profile.
I also wouldn't underestimate the tendency of the Fed to overshoot during their hike/cut cycles. Looking at what is priced in to the market (and dealers are watching this closely for opportunities) in Eurodollars/Fed Funds, no one is discounting that the Fed may overshoot to 5.25% or 5.50%.
True indeed. Never underestimate the inertia of a bureacracy and the policy that they are on. Don't forget though, that one week ago, Euro$'s/FF were discounting 5.25% - only to rally about 20-25 points.
I agree that there isn't much risk/reward in taking a position in Sept Eurodollars right now. I am further out - the Dec 07s - and I like my position. Might the Fed go too far? Absolutely possible - and that would certainly cause some short term pain in my position. Yet if they go too far, I think that means that they will need to cut rates sooner and more drastically.
Housing isn't just slowing down in many parts of the country, it is collapsing. I can't really imagine how bad things might get if short rates go up another 75 basis points and stay there.
Quote from mcurto:
I also wouldn't underestimate the tendency of the Fed to overshoot during their hike/cut cycles. Looking at what is priced in to the market (and dealers are watching this closely for opportunities) in Eurodollars/Fed Funds, no one is discounting that the Fed may overshoot to 5.25% or 5.50%. At this point getting long Sep euros seems relatively futile (unless you think 4.75% is end point) in terms of risk/reward. Same with going long the 2-year note at 4.60% right here ahead of auctions and the Treasury refunding along with more Fed meetings. I'm not necessarily saying the Fed must go to 5.50%, but am looking at that as the trading opportunity that no one has priced in yet and possibly the best risk/reward profile.
You may be right, have not seens strong move down in the 2yr yet. Still long an waiting with a tight stop.
For the rest of the week, I expect to see the second phase of the <a href="http://elitetrader.com/vb/showthread.php?s=&postid=1009127#post1009127">bounce</a>, during which the premium on long maturities will shrink.
I'm having second thoughts. I was expecting bonds to rally this morning and they're not. The levels at which the recent rally was interrupted (Friday's correction,Bernanke's speech) might have coagulated into resistance. Considering how close I am to my price target, I don't think it's worth the risk of sticking around so I decided to liquidate my remaining calls.Quote from steveosborne:
For the rest of the week, I expect to see the second phase of the <a href="http://elitetrader.com/vb/showthread.php?s=&postid=1009127#post1009127">bounce</a>, during which the premium on long maturities will shrink.