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Bond rally nearing an end?
- Thread starter gharghur2
- Start date
Haha, good stuff daddyeaux. On a more serious note, EDF Man purchased over 30,000 August 104 puts in the 10yr options (expiring Friday) after the PPI number for 2 and 3 ticks and throughout the rest of the day. Obviously either a massive dealer hedge or hedge fund spec play and they will try to flip out of them for 4 or 5 ticks after CPI and Big Ben tomorrow. On the other hand, the Goldman prop vol selling machine was back in action adding another 5,000 shorts to the Sep 105 straddle in the 10yr options (already short 10,000 from last week). WAMCO (similar management style to PIMCO, even located in California too) continues to add to TUT steepeners and is over 30,000 long over the past month. Little bit of call buying by Countrywide in the Oct 106 calls, 5,000 only. As for tomorrow, a .3% increase ex-food and energy practically solidifies a Fed move in August while .1% will definitely put odds back to 50% or even less. Short 2yr was a great trade when it was less than 5.10% in cash and barely led the curve lower today. Should be an interesting one tomorrow. For what its worth some longer term Fed bets being placed as JP Morgan was loading up long on December 07 Euros at 9453.5, about 7,500 or so, obviously a play on the Fed ultimately easing around mid-year.
The stock market seems to be much more sensitive to what Bernanke is about to say than the bond market: <b>1.</b> Ahead of Bernanke's testimony tomorrow and Thursday, stocks were going sideways in a narrow range for a second day until they staged a small rally in the last hour (finally responding to dropping oil prices) while bonds had already taken the liberty to respond to the PPI report; <b>2.</b> While any hint of policy accomodation would be unambiguously positive for stocks, bonds would probably show a mixed reaction because of persisting concerns about inflation. Stocks would also respond very well to additional signs of economic strength.
I also believe that when speaking directly to US Senators, the Chairman of the Federal Reserve tends to emphasize a little more the positive aspects of the economy or the chances for more policy accomodation.
I also believe that when speaking directly to US Senators, the Chairman of the Federal Reserve tends to emphasize a little more the positive aspects of the economy or the chances for more policy accomodation.
The stock market rally was very predictable but the magnitude of the bonds bounce surprised me a little bit.
So the next step is to look at oil which is doing nothing right now. This means that the market is evaluating whether the Fed is dovish because it wants to accomodate a battered stock market or because there's something we don't know and that the economy is weaker than we think.
There are 2 or 3 possible scenarios from this point on but since I think Bernanke was mainly trying to provide relief to the stock market, the most likely scenario is that oil is going to join the party and at that point I will add to my short bond position and ride them down with a BIG position. For now, let's keep an eye on oil.
So the next step is to look at oil which is doing nothing right now. This means that the market is evaluating whether the Fed is dovish because it wants to accomodate a battered stock market or because there's something we don't know and that the economy is weaker than we think.
There are 2 or 3 possible scenarios from this point on but since I think Bernanke was mainly trying to provide relief to the stock market, the most likely scenario is that oil is going to join the party and at that point I will add to my short bond position and ride them down with a BIG position. For now, let's keep an eye on oil.
More like massive short covering. Open interest in the 10yr was up by 115,000 yesterday after the PPI. Strong CPI today and everyone was satisfied with their shorts so they decided to cover. We will end up trading almost 1.5 million contracts today, will be interesting to see tomorrow's open interest. Goldman still short 15,000 of the Sep 105 straddles, so we should slingshot back there at some point.
Quote from steveosborne:
There are 2 or 3 possible scenarios from this point on but since I think Bernanke was mainly trying to provide relief to the stock market, the most likely scenario is that oil is going to join the party and at that point I will add to my short bond position and ride them down with a BIG position. For now, let's keep an eye on oil.
What are the scenario that will make you change your mind and get out of your shorts?
Thanks,
luc
I think front end shorts should not quite throw in the towel. Manufacturing data has yet to really soften. It is a given job growth is still solid but not running at a breakneck pace. Don't forget about the inflation bug that has started to bite. Despite what Bernanke tells the market inflation is running at the upper end of all acceptable ranges and the Fed is trying to pick a top in inflation with the Fed funds rate. We all know how dangerous it is picking tops and bottoms in the market, really not different at all in the Fed's case. Growth is moderating but is still pretty solid, doubtful the US will be a leader into any type of global recession. Look at China, how China goes these days the rest of the world seems to follow, and correct me if I'm wrong but an 11% growth rate doesn't hurt the global economy. Japan is even removing easy monetary policy to allow growth, and the inflation word has been mentioned there, it hasn't been around for centuries in that country (haha). Not quite time to throw in the towel being short the front end.