Bond rally nearing an end?

Quote from mcurto:

Looking at 5yr yields back to 2000 or so these are multi-year highs, so still plenty of time to get long on a long-term basis.
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I am somewhat more bearish on the long end of the curve going forward. Look at the 20yr tip auction this week which had a 2.5% coupon. Thus, with long bond rates at 5%, the market has built in 2-3% inflation (the real thing, not core) going forward - this seems very optimistic! Inflation could be much higher over the next few years. I would argue that the recent low interest rates stimulated very little capital investment (technology stocks in a funk, industrial profits soar), but a lot of financial liquidity (credit conditions are a virtual nirvana).

Unless we get a real melt-down in the BRIC economies which releases a ton of spare capacity for the world’s developed economies, the low rate of capital investment will lead to strong upward pressure on global price levels. This should be the scenario for the next few years.

Question for mcurto: I was wondering if locals in the financial pits are planning to spend more time in the Ag pits after the side-by-side trade starts next month? I read that booth space is hard to find in Ag pits but plentiful in financial pits. Sounds like people are more bullish on Ag volatility than financial vol.
 
Speaking of financial vol merrill lynch just sold 20,000 plus Sep 106 straddles in the 10yr options. That should probably answer your question. We are possibly hearing this is a hedge for long Swap vol but looking for someone linked to that community to confirm.
 
This big European hedge fund (Vega Asset Managment, we think) not only sold those 20,000 10yr straddles outright but also the Sep 104 straddle in the 5yr options outright 10,000 times. These guys put on a similar bet in 10yr vol a year or two ago and pinned the 112 strike three expirations in a row. A push above 106 in TY after PCE (that is if it is soft, which I don't think it will be) should be met with massive capitulation by shorts.
 
ZB's have been trying for six days in a row to reach 108 and stay above it. The 108 level is very well defended and was always reached with bad timing for the bulls. If they had succeeded in going through 108 at the exact same time stocks would be dropping on significant news, the move would have had enough momentum to make the bears capitulate. The fight is not over and one side will soon have to give up the idea of conquering or defending the 108 level.
 
Quote from mcurto:

This big European hedge fund (Vega Asset Managment, we think) not only sold those 20,000 10yr straddles outright but also the Sep 104 straddle in the 5yr options outright 10,000 times. These guys put on a similar bet in 10yr vol a year or two ago and pinned the 112 strike three expirations in a row. A push above 106 in TY after PCE (that is if it is soft, which I don't think it will be) should be met with massive capitulation by shorts.
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If it was Vega, remember they also made headlines last year with some high profile trades that went bad. I think they saw a few billion dollars evaporate from their funds in a combination of redemptions and bad bets. I guess when you are playing with other peoples money you can afford to take a lot of risk!
 
Quote from mcurto:

This big European hedge fund (Vega Asset Managment, we think) not only sold those 20,000 10yr straddles outright but also the Sep 104 straddle in the 5yr options outright 10,000 times. These guys put on a similar bet in 10yr vol a year or two ago and pinned the 112 strike three expirations in a row. A push above 106 in TY after PCE (that is if it is soft, which I don't think it will be) should be met with massive capitulation by shorts.
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What's your take on today's action? Is there more upside to go? Doesn't look like there is massive capitulation by shorts, is it?

Thanks,
luc
 
Quote from steveosborne:

ZB's have been trying for six days in a row to reach 108 and stay above it. The 108 level is very well defended and was always reached with bad timing for the bulls. If they had succeeded in going through 108 at the exact same time stocks would be dropping on significant news, the move would have had enough momentum to make the bears capitulate. The fight is not over and one side will soon have to give up the idea of conquering or defending the 108 level.
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Sliced thru 108 easy in the morning but looked kinda schetch in the aft, looked like it may give it back, AGAIN... Fight's certainly not over, the rally has been slow and meticulous, but with no failures so far, just having to go thru lotsa resistance on low volume...
 
Landboy, LuckyHonda,
It looks like we're looking at things the same way. Today's growth and inflation data had the same meaning Bernanke's testimony had last week and markets reacted the same way. Oil dropped and stocks rallied. Bonds shot up three quarters of a point but that was half of what they gained on the day Bernanke spoke, right after after bonds dropped on worst than expected core CPI.

There are two reasons with two different implications for bonds not to make bigger gains today. Stocks are much stronger than they were in the morning of July 19th so there is a little bit more confidence in economic growth now than there was last week but on the other end, today is Friday and was the worst day of the week to reach the 108'16 intermediary top. Having exercised restraint today, bulls will continue to move the market higher Monday but if stocks continue to rally or if oil prices maintain their support, the risk premium will inevitably start growing again. Treasury yields are currently offering a small compensation for inflation considering the rate at which core CPI and core PCE are now growing. Also, markets will be waiting anxiously for the employment report released next week so no, the fight is not over.
 
Thanks Steve!

I was playing long the past three weeks, but started selling on today's action. 108 was a key level which may or may not hold next week. Have a nice weekend.
 
Surdo,
How appropriate. I wanted to congratulate you for beefing up your long position after Bernanke spoke last week. At that time I also thought about converting my outright short position into a bearish spread or straddle with the intention of selling the long leg a few days later but I didn't. Have a good weekend too.
 
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