Bond rally nearing an end?
- Thread starter gharghur2
- Start date
Many many reasons, but ONE of them is that as absolute rates rise, corporations that use the swap market to hedge floating rate debt into fixed rates. Absolute rate swaps are priced as spread over T's. More anticipated demand -->wider spreads (usually).
A simplistic explanation, but I think you get the idea. There're a ton of books out there now explaining what used to be considered rocket science. But now 15yrs later, swaps and related instruments are fairly generic and ho-hum.
The Goldman Sachs buying was most likely for a customer account, which is none other than the PIMCO machine, they were buyers initially at 106-15 down to 14 in the pit (along with a bunch on the screen), and then again as we shot off the lows in the last hour or so of the day from 106-06 all the way up to 106-10, about 5000 total at that point in the pit along with at least twice that on the screen. PIMCO of course sold 10,000 June 103 puts as they do every time we break (and likewise they sell out-of-money calls on every rally). As for Goldman prop, they were steady sellers the whole way but who knows what else that is against, and their core volatility position still remains short in the May 107 and September 107 straddles, while they continue to take profits on their June 107 straddles. At this point they have also begun buying protection in 5yr and 30yr straddles as 10yr vol is fairly well bid these last two days. I wouldn't be surprised if this short Treasury vol position is against something else vol-related in Swaps or MBS.
As for the Japanese, you hit the nail on the head. For the most part they concentrate their long positions in cash notes and bonds, which remember, always earn interest income. Historically they do create demand in the long run, but more often than not they are net sellers into their fiscal year end, which is the first 3 months of our year (look at MoF data to confirm). So why not buy puts that will profit from a bond market that is not necessarily going up. This essentially allows them to protect their core position while they await a large enough drop in the cash market to "cheapen" the notes and bonds they are perpetually long. It is essentially a hedge on their buy levels, say above 4.90% in the Ten-year (May 106 strike) and equivalent 30yr cash yield to the May 108 and June 107 strikes.
Bonds/Notes/Bills: The 30yr/10yr were under selling pressure all week, as long term rates continue to rise, as expected. They are in a bull market, and I see the selling continuing! The 2yr/90day conversely appear like rates are topping here, especially in the 90day. Waiting for this to get resolved.
Are we returning to a normal yield curve ?
Any thoughts?
Are we returning to a normal yield curve ?
Any thoughts?
I don't believe the bull market in rates is over for the short term instruments, just a correction. Maybe 25 - 50 basis points.
But in the longer term 10yr/30yr, the bull market in rates is far from over. Actually, it looks more like it's just beginning. Fear for those people with interest only mortgages.
But in the longer term 10yr/30yr, the bull market in rates is far from over. Actually, it looks more like it's just beginning. Fear for those people with interest only mortgages.
