Is the Bull dead in Bonds??
- Thread starter stocon
- Start date
As technical traders we often ignore the "why" behind a move, preferring to focus on the "what". The "why" often is hard to discover and media explanations are frequently wrong.
Some markets however require an intense focus on the "why." Interest rates are one such market (Currencies are another.) I think the "why" in bonds can be directly attributed to hedging by mortgage investors. That hedging activity has a vicious circle nature to it, as lower prices require more selling and vice versa. When the hedge books are so enormous, the effects can be brrutal.
If we accept that the rally and sell-off in bonds were the result of mortgage hedging, why haven't we seen such spikes before? I think the answer may lie in the greater scrutiny being placed on the twin towers, FNM and FRE. They are under intense pressure to mark their hedges to market and disclose the results ina transparent way, rather than bury them as in the past. So perhaps they are applying a quick trigger and inadvertently producing unprecedented volatility as a byproduct.
Will it continue and if so, in what direction? Vol's tend to be mean reverting. If they're not, there will be some pretty ugly blowups in fixed income, as I can't believe portfolios can take too much of this battering. The Treasury also has an interest in this, as they will be offering increasing amounts of government debt. I'm not so naive not to think they can lean on the agencies to calm the market down.
So look for more stable rates, perhaps even a flattening of the curve from the long end.
Some markets however require an intense focus on the "why." Interest rates are one such market (Currencies are another.) I think the "why" in bonds can be directly attributed to hedging by mortgage investors. That hedging activity has a vicious circle nature to it, as lower prices require more selling and vice versa. When the hedge books are so enormous, the effects can be brrutal.
If we accept that the rally and sell-off in bonds were the result of mortgage hedging, why haven't we seen such spikes before? I think the answer may lie in the greater scrutiny being placed on the twin towers, FNM and FRE. They are under intense pressure to mark their hedges to market and disclose the results ina transparent way, rather than bury them as in the past. So perhaps they are applying a quick trigger and inadvertently producing unprecedented volatility as a byproduct.
Will it continue and if so, in what direction? Vol's tend to be mean reverting. If they're not, there will be some pretty ugly blowups in fixed income, as I can't believe portfolios can take too much of this battering. The Treasury also has an interest in this, as they will be offering increasing amounts of government debt. I'm not so naive not to think they can lean on the agencies to calm the market down.
So look for more stable rates, perhaps even a flattening of the curve from the long end.
I am not an expert in this area by any means. But the increase in volatility was off the charts, so I think it is reasonable to assume something out of the ordinary was at work. I don't have the data at hand to compare with past incidents like LTCM. I just saw a reference to an article in the NYT this weekend that made the point the mortgage market now is the tail wagging the dog of the economy. I'm sure there are members here who have a much better handle on this and I would like to hear what they have to say.
did you see this
http://www.fool.com/news/commentary/2003/commentary030813bm.htm?source=mppromo (posted by easyguru)
