Bond rally nearing an end?

I wouldn't necessarily commit to longs yet either. The 10yr has been hammered with size right near key support levels, 5.15-5.20% in cash and right around 104-20 in futures. A little more than 500,000 contracts traded today, on a nothing day, in a 4 tick range, that is saying something. The market is ready for a big move as the sheer size of some of these orders (5000 lots sold at market in a range . . . hmmm) is scary. Possibly a couple reasons to back that up: (1) Mortgage hedgers have already begun to roll their 106 call hedges down to the 105 strike, essentially saying that any spike above 105 is not as likely to happen and if so it won't stay above there for long (Countrywide about 20,000 of these down into the Sep 105's today), (2) big speculative funds are still moving in and out of massive put positions, today a large London hedge fund (basically the old CSFB London desk, about $10 bil under management) bought 20,000 Dec 102 puts, and is long 20,000 Sep 102 puts all in the 10yr. Obviously at face value these are long term positions, but time decay is so great their timing in buying these options HAS ALMOST ALWAYS preceded big down moves. Dealers describe levels below recent lows in the 10yr of 104-15.5 "dicey" at best. Having said that, I have been trying to get short the past few days and have basically scratched, but I still think there is a little bit left in these things to the downside, the 5.00% push was a pretty big failure.
 
I hate how "the bond market's got it wrong" lately, there really seems to be no concensus the one day to the next... There wasn't a follow through on the push higher, and that was telling...

Shoulda taken profit when I had the chance... Waay too much anticipation for that CPI number...
 
"Obviously at face value these are long term positions, but time decay is so great their timing in buying these options HAS ALMOST ALWAYS preceded big down moves."

Information like this is why I always come to this thread. Thanks mcurto.

I would have to agree with you as well as the previous 2 posters. No action for 3 days in a row, can only mean one thing, a big move one way or another.

To anyone just getting into bonds and following along, keep in mind that on occasion, the ZB's will have a big move down and almost immediately follow with a big move right back up, in the same day. I call it a "V" day, but I'm sure there is a more formal name. I hate V days, especially when I'm solidly biased and make the right call on the down move.
 
More HUGE bearish options positions today and some monster orders hitting the bid. Has been several 10yr 1x2 Put spreads 10,000 lots plus. Watch out below still, thin air at these levels.
 
Quote from landboy:

What's with this 50bps talk??? I can't believe it's actually being slightly priced in... crazy...
More...
There was supposedly a meeting between the Fed and the large banks to see how the market would accept a 50-basis-point hike, but it has been denied," said a foreign exchange trader with a New York asset management firm. Asked whether the rumor was moving the Treasury market, the trader said, "Yes."

"It's our practice not to comment on rumors", a Fed spokesman in Washington said when asked about the rumor.

- From Reuters

------------------------------------------

There has been a small but growing chorus of market participants who are
re-thinking the odds of a 50 bps rate hike by the FOMC at the June 29th meeting.
David Rosenberg of Merrill Lynch wrote a well-structured piece yesterday morning
in which he laid out a cost-benefit analysis of the Fed moving 50 bps next week.
There has been talk of a more aggressive Fed this morning, as Barclays Bank is
now calling for a 6% Funds rate by the end of the year, and there has been very
large put buying in very front-dated eurodollar options the last few days in a
recalibration trade of possible Fed intentions. Some of the more interesting
points raised by the team at Merrill:
1) A 50 basis point move would help cement Mr. Bernanke's anti-inflation
credibility issues that are still perceived by many in the market as being a bit
too soft.
2) A 50 basis point move would perhaps allow the Fed to pause, or even stop, the
current tightening cycle to gauge the impact of 2 years of measured rate hikes
on both the overall economy (demand indicators) and on the housing market.
3) A 50 basis point move would allow the FOMC to scrap the current statement and
construct a new statement for the market, one perhaps tailored by Mr. Bernanke
himself.
4) A 50 basis point move--accompanied with an official pause or stop--would help
clear the path for "animal spirits" and risk-taking to perhaps return to
domestic equity markets and emerging markets. The equity markets would perhaps
react positively, especially if there is clear vision regarding future Fed
policy.
5) A 50 basis point move--accompanied with an official pause or stop--is
certainly not unprecedented. In fact, quite the contrary. Every Fed tightening
cycle since the late 1980s has ended with a "bang" or with an "innoculation
shot". With a 50 basis point shot, one would think that longer-term future
inflation expectations would probably drift lower, which in turn would help the
case in #4 listed above.
6) A 50 basis point move--accompanied with an official pause or stop--would
allow the Fed time to not only gauge demand side indicators within the economy,
but it also would allow the Fed time to gauge the market's reaction to a 50
basis point rate hike ahead of the (former) Humphrey-Hawkins testimony we may
receive in late July. Sorry Maria, but the Fed Chairman would have almost a
month to tailor his testimony to focus on future policy and perhaps further
discuss Mr. Bernanke's real mission: inflation targeting.
7) If growth continues to slow, inflation should slow along with it (with a
lag,of course.) Unit Labor costs (+0.3% yoy) continue to be rather tame, and an
argument could be made that the rise in energy and Owner Equivalent Rents could
prove to be transitory.
8) Unsold housing inventory is now at an all-time high, and unsold inventory is
now +35% yoy; the FOMC has been careful to mention the housing markets in
recent speeches and writings. The building permits data of earlier this week do
not suggest that future housing activity will accelerate and that--if
anything--the housing slowdown may get much, much worse.
9) At 5.50%, the FOMC would have plenty of arrows in its quill if the BOJ began
to further withdraw liquidity and if the withdrawal of global liquidity were
accompanied by a reduction in leverage and increased market volatility. At
5.50%, the FOMC could easily allow the BOJ and ECB to take a more active role
in this global tightening campaign.
 
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