who is trying to squeeze bonds?

Some very interesting articles on the 10yr squeeze. I have been on vacation last two weeks so missed the Bill Gross denying he is the squeezer situation. Although, he is long a bunch of 10yr notes, 22 to 27 year cash bonds, and 30 yr bond futures. My guess is there will be huge demand for upcoming 30yr auctions in February and Gross will take down a sizeable amount of them. There were a bunch of rumors on the floor during the June expiration cycle that a huge JP Morgan trader was the one short the 10yr futures (Gross probably long them) and ended up costing JP their quarter (Dimon spoke of large trading losses). I don't think it is necessary to impose position limits, because it is essentially one huge fund up against one huge prop trader in most cases and those guys don't need to be told the risks, they already know them. Last expiration June futures had about a 15 tick range in the last minute in the pit, and the Goldman pit broker was the one who got screwed on it. It looks like Sep may be even crazier considering the CTD is in even more limited supply. Should be interesting to say the least. Might want to watch the Sep-Dec ten year spread as we get closer to roll, there is also an interesting situation developing in the Dec futures, as someone is long nearly 75,000 Dec 110 calls in the ten year (bought them when futures were way in the money at 113 all the way down to 110). The option locals sold him ALL of these calls and are essentially short 75,000 sep-dec futures spreads, so they could get squeezed out on expiration too.
 
Quote from mcurto:

Just found a cool article saying that Berkshire Hathaway (Warren Buffet's company) got smoked being short a bunch of forward dollar contracts. Although they made nearly 2 billion being short last few years. Funny coming from a guy who has openly said derivatives are bad and dangerous.

http://news.yahoo.com/s/ft/20050814/bs_ft/fto081420051604336264
More...


Buffet has been holding that position for over 3 years.

From what I understand, it's not an "investment" for him. Rather it's a currency hedge. Buffet along with all other astute players who are over exposed to the USD have short it. Their analysis shows massive devaluation ahead. How else do you think we're going to pay off all that debt?
 
I very concerned about Warren,,

he's down to his last $43 billion......which only means that an eyebrow and nose hair trim must cost $44 billion in Omaha
 
Interesting WSJ article today that states that Citadel played a significant role in the squeeze of the June contract. Once again, these guys don't need to be told the risks, they run billions of dollars. Although it sounds like Gross got the short end of everything, his notes are now worth more and he is long them, so in the end he'll be okay (because yields are going to 3% anyway).
 
The 10Y squeeze for the Sep. futures.
Here are some of the terms of the situation:

>>[...] all eyes will remain on the ongoing potential for a
squeeze in the 10-year sector given that the cheapest-to-deliver on the September 10-year futures, the 4-3/8% of Aug/2012, is a $19.6 billion issue and that the notional value of the outstanding September 10-year stands at over $135 billion headed into the week ahead.
>>

>>The New York Fed reported big borrowing in the issue this week with $1.863 billion lent on Friday on the heels of $1.823 billion on Thursday. The Aug 2012 was quoted out to Sept. 30 at a rate of 0.95%, and fail on an overnight basis.

The ongoing concerns of a squeeze could push the Sep/Dec 10-year futures spread wider, with some estimating 28.50 from the current 27 in the week ahead, future salesmen say.
>>

<< CHICAGO, Aug 26 (MktNews) - Traders still debated the possibility of large scarcity in the 4.375% Aug. 2012 cash 10-year note as the issue goes on "special" in the repurchase market.

Some said Friday that the potential for a squeeze could continue as long as the Sept. 30 settlement of the 10-year futures contract.

Concerns heightened Friday as the 4.375% Aug 2012 issue traded at 0.95%, on very hot "special", in the repo market out to the Sept. 30 date. The overnight market for that issue was quoted even tighter at a zero percent rate, which is "fail."

The issue garnered such demand as it is the cheapest-to-deliver (CTD) issue needed to settle the September 10-year futures contract.

Market players scrambled to get the 4-3/8% Aug 2012 issue Friday as the New York Federal Reserve Bank reported big borrowing in the note for the second consecutive day. The Fed lent out $1.863 billion Friday, on
the heels of $1.823 billion lent on Thursday.

"They're hot as a pistol," said one trader. "They will be tight
right into the Sept. 30 settlement. People are looking at open interest in 10-year futures: it's very high still. It will be the same sort of situation as was in the June shortage."

Some market participants questioned why the issue can be borrowed for a rate to the Sept. 30 date in repo, but was at zero percent, or "fail," in the overnight repo.

One source said the answer was optionality "at a deep level,
relative to scarcity as a function of the time until the contract
expires, where the paper is presumed to be MORE scarce sooner, and less scarce later."

>>

So the factors in play seem to be:
- the cheapest-to-deliver on the September 10-year futures, the 4-3/8% of Aug/2012;

- the difference between its $19.6 billion issue and the notional outstanding ( $135 billion);

- the fact it traded very 'hot' 'special' (?)on the repo market;

- the NY Fed reportin borrowing in the issue;

- how it can be borrowed in the repo mkt but its quote is "fail" (?);

- the fact this issue is the CTD needed to settle for the 10Y futures and
- that this futures still has a high open interest.

- other?

* Well, sorry for my ignorance, but is there someone able to explain me how the 10Y futures squeeze works in a step-by-step easy to understand manner?
Thanks! :p

Bernard111
 
First of all, I would get a copy of Galen Burghardt's The Treasury Bond Basis, as this book explains squeezes perfectly. Squeeze situations can occur because of when and if large market players in Treasuries (one of them being Pimco more often than not) decide to roll their futures position. Someone with a big position like Pimco will monitor the Sep/Dec spread because they will often have a fair value for the spread that tells them when to begin rolling the position or at least look for opportunities to roll. At this point, it may be too expensive for Pimco and others to roll as once again the September contract is valued so much higher than the others (was way higher than the June causing spread to go negative and way higher than the Dec causing spread to widen big time). That is why there was a HUGE Lehman Bros. account rolling Sep into Dec as soon as the June contract expired (considered extremely early for rollover), but at the time the spread was probably more reasonable to their fair value, was trading around 23. The same thing occured in the five-year note, Lehman Bros. again, each contract they did about 80,000. In my opinion the CBOT has created greater problems by instituting the position limits in the Dec contract, because the cash market characteristics may not be the same, and generally in the last 10 days of the contract its usually just a couple big players looking to roll a position, they don't need to be told the risks. A lot of the squeeze stuff is simply increased activity in Treasury futures because of great liquidity and easy execution and not enough issuance in the cash market. One of the markets is growing significantly while the other is not able to catch up as of yet. We could possibly see some guys just liquidate their position starting with the Dec in the last 10 trading days rather than roll into the March 06 contract, depending on where the spread and their fair value are at.
 
Major short squeeze this past hour in the 10 year note. Looks like a new weekly uptrend in the making. Anyone care to comment why?
 
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