Yep, big time short squeeze today, lot of fun to watch. Only guys selling this stuff on the way up are Goldman, sold a TON of dec ten years on the way up, probably 5000 or so in the pit and more on screen. Once again the NOB steepened big time, some guys squeezed out of NOB flatteners today. The bid in oil helped the first move higher, then month-end buying came in to extend duration as the Lehman benchmarks increase duration, could see more tomorrow. FOMC minutes had issues with oil being negative for spending. The flattener still should be good till inversion because the Fed seems like they will still be forced to raise rates to contain the inflation they somehow see ahead. Just an opinion.
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who is trying to squeeze bonds?
- Thread starter JohnL111
- Start date
Quote from mcurto:
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.
I really have to buy a copy of the book Galen Burghardt's The Treasury Bond Basis. Otherwise, I suspect, I would not be able to understand your squawkbox, too!
Thanks again for your comments.
B.
The squawk is easy to understand, only thing to brush up on is the yield curve spreads (FIT's, NOB's, FOB's, etc). Burghardt's book is very dry, the only part I read was trading the calendar spread based on CTD supply and demand. The rest of the book is for basis guys (need a whole weekend to read it, and then probably have to read it again, very confusing).
Quote from mcurto:
Yep, big time short squeeze today, lot of fun to watch. Only guys selling this stuff on the way up are Goldman, sold a TON of dec ten years on the way up, probably 5000 or so in the pit and more on screen. Once again the NOB steepened big time, some guys squeezed out of NOB flatteners today. The bid in oil helped the first move higher, then month-end buying came in to extend duration as the Lehman benchmarks increase duration, could see more tomorrow. FOMC minutes had issues with oil being negative for spending. The flattener still should be good till inversion because the Fed seems like they will still be forced to raise rates to contain the inflation they somehow see ahead. Just an opinion.
10 year t-note shorts got a broom stick shoved up their you know what. Does'nt look like they can muster the firepower to pull out the stick.
Btw, I enjoy reading your inside scoop of the bond pits. Very informative. Bonds look overbought right now, imo should see some profit taking next few days?
Goldman today was licking their wounds. For the most part not active in the ten year, was a light buyer at 04 the last hour of the day. Was very active with the yield curve trades last few days, sold about 5000 FOB's today, sold about 3700 FIT's today and yesterday, essentially curve flatteners and the curve has steepened greatly last two days (could be taking profits on curve flatteners but doubtful because Dec just became front month today so probably new position). Then they sold about 5000 two year notes around 103-17 down to 16, looked good early, traded to 14.75, then nasty rally late and the shorts weren't looking so good again.
Quote from mcurto:
Goldman today was licking their wounds. For the most part not active in the ten year, was a light buyer at 04 the last hour of the day. Was very active with the yield curve trades last few days, sold about 5000 FOB's today, sold about 3700 FIT's today and yesterday, essentially curve flatteners and the curve has steepened greatly last two days (could be taking profits on curve flatteners but doubtful because Dec just became front month today so probably new position). Then they sold about 5000 two year notes around 103-17 down to 16, looked good early, traded to 14.75, then nasty rally late and the shorts weren't looking so good again.
Mcurto,
I understand u run a squawk do u trade bonds as well? Also I find your posts very interesting to read for someone who trades bonds intraday. 1 more question im curious to know if bond vol. has been bid lately i used to work for a option market making group at the CBOE and i trade futures now so im always curious about volatility movements in the bonds.
Yes I do trade the 10year (not huge size) and will sometimes do yield curve stuff (mainly the NOB). As for bond vol it has been bid on the rallies the last few days but subsequently will come off as we trade off of the highs. There was an interesting play put on by Merrill today, they legged into a vol steepener in the options. They bought nearly 10,000 dec 108 straddles in the five year to sell about 4,000 dec 118 straddles in the bond. I do not know too much about yield curve options plays like this but seems to me it will benefit most from a curve steepening from these current levels. Although, I woudn't want to be short a ton of 30 year vol here, especially if the Fed decides to continue raising or somehow inflation creeps up, as it seems 30 year vol would explode if we dropped 5 handles from these levels (probably not likely).
Thanks for the reply mcurto. All I have to say about today is WOW. I talked to a few guys who have been trading bonds longer than I have (started trading 3/04) and they are saying they havent seen the market trade like this since 7/2003. Also alot of people had been saying that they expect bond volatilty to pick up once greenspan leaves hopefully this week is the beginning of that.
I was gonna say the exact same thing. Hasn't been as volatile as today is for some long time. Paper getting squeezed out of flatteners across the board, 2-10 year curve got all the way out to about 30 bps, off from lows earlier this week of about 10bps, that is a massive move. NOB spread all over the place too. Maybe we are back in a period where the big locals move the market, Brumfield has really pushed the tens all over the place today, he bought 05.5 earlier, then was 13 bid within a couple minutes, then traded back to 07, he got short, sold more at 05, traded to 00. Incredibly illiquid right now on the screen.