Question about what moves the Bond market

R

Ronjohn

Hi,

I have been doing some research about the five and ten-year bond. I have observed that unemployment and FOMC announcements impact the direction of the bond. I have also been researching the yield curve. I have also noticed the SP500 moves in opposite direction of the bond. I wanted to ask any bond traders where I should be looking for possible changes of direction. Is there any other index I should be watching? Any other news releases to be concerned about. I would appreciate any help.

Thank you
 
Last edited:
I can answer this question with a billion different variables. I'll give you an extreme over simplification for now (if you want to ask questions about the details feel free to ask);

1. 5-Year Note
* Governed by heavy interest rate direction and shorter end duration moves. Most of the time, if U.S. CPI is super hot or cold, the 5-year note will stomp in one direction because it's influenced by shorter-end curve moves as interest rate portfolios adjust
* Also, during FOMC decisions where clear direction may or may not be made on interest rates, the 5-year note will stomp as well

2. 10-Year Note
* The risk-free rate of the entire world.
* If there is a giant German 10-year Bund move, the T-Notes will be leading harder than the 5-year (during European session primarily)
* If there is a giant Oil move, the 30-year bond may move and therefore lag the 10-year note. The 5-year note will lag the least behind.
* If there is an S&P500 move, the correlation bots will usually hit into the T-Note and therefore the 5-year note will be a laggard
* If there is a giant currency move, the correlation bots will scramble into the T-Note again

If you are trading the FYT spread (5yr vs. 10yr) you need to consider the moving nature of both legs.

During FOMC and CPI, anything which shifts the agenda of interest rate direction then the FYT will move linearly in that direction

Also to note, if the T-Notes are busting a level outright there will be insane T-Note volume in that direction and the FYT will go the opposite of that direction as well as the T-Note order flow pops in

Let me just say that since the interest rate cycle is basically (in historical terms) sleeping right now, I would probably try trade the NOB spread instead (10yr v 30yr) because you have levels which are more vertical that hold and break, and you can get better risk/reward setups and less brokerage. Also, more idea generation.

But, to do a summary, at the end of the day, the T-note rules the world. Everything else is just a cuckold.
 
s0mmi said:
I can answer this question with a billion different variables. I'll give you an extreme over simplification for now (if you want to ask questions about the details feel free to ask);

1. 5-Year Note
* Governed by heavy interest rate direction and shorter end duration moves. Most of the time, if U.S. CPI is super hot or cold, the 5-year note will stomp in one direction because it's influenced by shorter-end curve moves as interest rate portfolios adjust
* Also, during FOMC decisions where clear direction may or may not be made on interest rates, the 5-year note will stomp as well

2. 10-Year Note
* The risk-free rate of the entire world.
* If there is a giant German 10-year Bund move, the T-Notes will be leading harder than the 5-year (during European session primarily)
* If there is a giant Oil move, the 30-year bond may move and therefore lag the 10-year note. The 5-year note will lag the least behind.
* If there is an S&P500 move, the correlation bots will usually hit into the T-Note and therefore the 5-year note will be a laggard
* If there is a giant currency move, the correlation bots will scramble into the T-Note again

If you are trading the FYT spread (5yr vs. 10yr) you need to consider the moving nature of both legs.

During FOMC and CPI, anything which shifts the agenda of interest rate direction then the FYT will move linearly in that direction

Also to note, if the T-Notes are busting a level outright there will be insane T-Note volume in that direction and the FYT will go the opposite of that direction as well as the T-Note order flow pops in

Let me just say that since the interest rate cycle is basically (in historical terms) sleeping right now, I would probably try trade the NOB spread instead (10yr v 30yr) because you have levels which are more vertical that hold and break, and you can get better risk/reward setups and less brokerage. Also, more idea generation.

But, to do a summary, at the end of the day, the T-note rules the world. Everything else is just a cuckold.
More...





Thank you very much. This will keep me busy for a while. I will research what you gave me, and get back to you if I have any questions.
 
Rohnjohn,

while s0mmi gave you some awesome stuff to tinker with (as always), here are some additional things to consider especially when you are trading outrights:

- first of all, correlation can change at any moment, but usually because of a risk event. When this happens, you want to stop trading until you found out why and whats the implication of the change in correlation. There where times, when oil was the name of the game, but now it isn't that much anymore. Just a tip so you can put the next ones into context. Nothing is set in stone.

- Flavour of the month (year maybe) is the long USD trade. Most crowded trade at the moment, I think. So you want to have a look at either the dollar index futures or at the yen as a substitute. They are correlated in flow, not in price though. So when you have your treasury ladders up, also have a 6J ladder up and watch the flow at the extremes/steps in the profile.

- Watching gold is also really important right now. Especially check how it traded during the asian session to get a lead on the opening. If gold sold of hard overnight, the R:R is really good if you lean on the offer in ZN or ZF

- S&P correlation is a little more complicated as it can disappear any minute and is more or less dependent on the macro theme of the day. In addition, if the day has flow the correlation between stocks and bonds is better where as it is almost random when there's chop over the whole board.

So in summary:
- if day has flow or there is a macro theme use the S&P as a leader for 3-5 ticks in the ZN or 10+ ticks in the ZB.
- if there is chop and you want to trade for singles, watch gold and the dollar if they can hold or break a level.
- if there's chop and you are not quite sure if a level might hold in the treasuries and the S&P suddenly makes a move, use it as context, but don't expect the treasuries follow tick by tick.

Correlation bots are more sensitive to the dollar IMO, just because everyone and their mom is long USD and the yen carry as well as the euro carry trades are overcrowded (borrow JPY or EUR , convert to USD and buy treasuries with it).

I'm usually more into grains these days after I ditched stocks, so take what I said as a primer. But when the time is right, paper comes to the treasuries and grains are dull I trade ZB and ZN, too.

Ah, one last thing. You might want to have a frequent look at yield charts for individual maturities (not the curve). Sometimes yields have a level as well and can give you a pretty good understanding if a break is real or not.
yield vs fut.jpg


10y Yield left, ZB right. Yields did not crack so this was a good hint on the move over 151.12 yesterday.

Also if there is an important level in the yield and no level in the futures, you sometimes can see pretty impressive flow against the trend. If you know the context and your trade location is good, you can ride out massive moves as the hedgers pump massive size into the market.

My take on your endeavour: First, read contract specs and get the levels for the day via charts. Then put up ladders of ZF, ZN, ZB, ES, CG and 6J (better in the first place since dollar index trades on ICE which costs 116$ for realtime data/month), close the charts and just watch the markets trade for a month or two. You will get a feeling of how they behave.

Much better than reading theories and learning technicals.
 
Last edited:
Lots of things can move bonds... Fundamentally, however, there are only 3 factors: central bank expectations, risk premium and convexity. Data or even flows can drive mkt participants to change their estimates of the above factors, leading to a move in bond yields.

You should read at least some of Antti Ilmanen papers.
 
MrMuppet said:
Rohnjohn,

while s0mmi gave you some awesome stuff to tinker with (as always), here are some additional things to consider especially when you are trading outrights:

- first of all, correlation can change at any moment, but usually because of a risk event. When this happens, you want to stop trading until you found out why and whats the implication of the change in correlation. There where times, when oil was the name of the game, but now it isn't that much anymore. Just a tip so you can put the next ones into context. Nothing is set in stone.

- Flavour of the month (year maybe) is the long USD trade. Most crowded trade at the moment, I think. So you want to have a look at either the dollar index futures or at the yen as a substitute. They are correlated in flow, not in price though. So when you have your treasury ladders up, also have a 6J ladder up and watch the flow at the extremes/steps in the profile.

- Watching gold is also really important right now. Especially check how it traded during the asian session to get a lead on the opening. If gold sold of hard overnight, the R:R is really good if you lean on the offer in ZN or ZF

- S&P correlation is a little more complicated as it can disappear any minute and is more or less dependent on the macro theme of the day. In addition, if the day has flow the correlation between stocks and bonds is better where as it is almost random when there's chop over the whole board.

So in summary:
- if day has flow or there is a macro theme use the S&P as a leader for 3-5 ticks in the ZN or 10+ ticks in the ZB.
- if there is chop and you want to trade for singles, watch gold and the dollar if they can hold or break a level.
- if there's chop and you are not quite sure if a level might hold in the treasuries and the S&P suddenly makes a move, use it as context, but don't expect the treasuries follow tick by tick.

Correlation bots are more sensitive to the dollar IMO, just because everyone and their mom is long USD and the yen carry as well as the euro carry trades are overcrowded (borrow JPY or EUR , convert to USD and buy treasuries with it).

I'm usually more into grains these days after I ditched stocks, so take what I said as a primer. But when the time is right, paper comes to the treasuries and grains are dull I trade ZB and ZN, too.

Ah, one last thing. You might want to have a frequent look at yield charts for individual maturities (not the curve). Sometimes yields have a level as well and can give you a pretty good understanding if a break is real or not.View attachment 170470

10y Yield left, ZB right. Yields did not crack so this was a good hint on the move over 151.12 yesterday.

Also if there is an important level in the yield and no level in the futures, you sometimes can see pretty impressive flow against the trend. If you know the context and your trade location is good, you can ride out massive moves as the hedgers pump massive size into the market.

My take on your endeavour: First, read contract specs and get the levels for the day via charts. Then put up ladders of ZF, ZN, ZB, ES, CG and 6J (better in the first place since dollar index trades on ICE which costs 116$ for realtime data/month), close the charts and just watch the markets trade for a month or two. You will get a feeling of how they behave.

Much better than reading theories and learning technicals.
More...



Wow, thanks for this detailed information. You sure do have a lot of great insight into the market. I will start observing this on the charts. Thanks for leading me in a positive direction.
 
Rumors and Facts moves markets

Ronjohn said:
Hi,

I have been doing some research about the five and ten-year bond. I have observed that unemployment and FOMC announcements impact the direction of the bond. I have also been researching the yield curve. I have also noticed the SP500 moves in opposite direction of the bond. I wanted to ask any bond traders where I should be looking for possible changes of direction. Is there any other index I should be watching? Any other news releases to be concerned about. I would appreciate any help.

Thank you
More...

Really, many are giving overkill of what to watch, there is fundamentals of other markets or reports, both can be right and both can be wrong, stick with the charts and trade what you see providing you can read charts. When it come to reports, the first move of sometimes a few seconds is usually wrong and market reverses, first moves are to sucker in the inexperienced as all markets do that. You have to have a well defined trend, if you can't tell what trend is, don't trade.
 
Last edited:
question for s0mmi, Martinghaul, and anyone else that would kindly reply with good input:

I've gone thru some bond books such as those of Annette Thau and Frank Faboozi. But, what are the best books that you've come across on bond strategies? I'm seeking deeper understanding on how huge entities think in terms of strategy.

Anyone have any must reads?
 
You must log in or register to reply here.
Back
Top