I don't know what really happened with the employment figures on friday. But I was really shocked by the reaction of the bonds. It was so hugh that even the S&P and NQ couldn't match. Even more dramatic than the cases in Oct 87 and Sep 11th. Why?
Why did the bonds reach so much?
- Thread starter hermit_trader
- Start date
If the bond plunge was really about inflation, then why now even though beans have doubled since last Fall and are at 17 year highs, Silver is over $8.00 an ounce, Gold has been above $400.00 an ounce for months, Copper has been at 6.5 year highs, crude oil recently got up to $38.00, etc.
The fact of the matter is that a ton of institutions have borrowed short ( on the yield cureve in order to invest long ). In other words, they have been borrowing at 1.5% and purchasing the long treasuries at 4% and making a ton of money. Since it would appear that there is finally evidence of some job growth, especially with the revisions, many market participants are starting to believe that rates are now due to rise and that there is no longer an "excess capacity thesis", hence they need to REVERSE the "borrow short, invest long" trade.
Also, you have a ton of mortgage institutions that need to "hedge" their portfolios. As a result, the price action feeds upon itself and you have a "turbo-charger" effect as market participants unwind previous interest rate bets, and/or need to hedge portfolios.
Hope this helps.
The fact of the matter is that a ton of institutions have borrowed short ( on the yield cureve in order to invest long ). In other words, they have been borrowing at 1.5% and purchasing the long treasuries at 4% and making a ton of money. Since it would appear that there is finally evidence of some job growth, especially with the revisions, many market participants are starting to believe that rates are now due to rise and that there is no longer an "excess capacity thesis", hence they need to REVERSE the "borrow short, invest long" trade.
Also, you have a ton of mortgage institutions that need to "hedge" their portfolios. As a result, the price action feeds upon itself and you have a "turbo-charger" effect as market participants unwind previous interest rate bets, and/or need to hedge portfolios.
Hope this helps.
Quote from hermit_trader:
I don't know what really happened with the employment figures on friday. But I was really shocked by the reaction of the bonds. It was so hugh that even the S&P and NQ couldn't match. Even more dramatic than the cases in Oct 87 and Sep 11th. Why?
Well not quites as dramatic as 1987 when bond futures were up 8-10 pts overnight. My best guess is that the trades into the 108-109 handles were cascading stops. ZN which trades at about 70% of ZB's volatility only broke 2 pts off the data.
There is no global employment creation since the rate employment stayed the same, they just put the accent on non-farm creation instead of global one. The news serves more and more as only pretext. As I said here the 3 consecutives tops on dow were already discounted at least since the 30th within 1 point and 3 point at worst: 10401, 10416, 10496 theorically
http://www.elitetrader.com/vb/showthread.php?s=&threadid=30650&perpage=6&pagenumber=2
So it is not this artefactual news that makes the global trend . The global trend is made as usual by speculation of institutions that during low interest period use this cheap money (deposited by people who have no choice than to accept) for inflating the assets they are buying and so inflate enterprises portfolios values who then show artificial improvment and are then upgraded by not so "independant" debt auditors like Standard and poors which will allow them again to borrow more at this higher rate (as well as consumers) and then they will begin to racket up the interest rate once more so that the cycle will end by a market correction and even crash depending on where we are in long term cycle.
http://www.elitetrader.com/vb/showthread.php?s=&threadid=30650&perpage=6&pagenumber=2
So it is not this artefactual news that makes the global trend . The global trend is made as usual by speculation of institutions that during low interest period use this cheap money (deposited by people who have no choice than to accept) for inflating the assets they are buying and so inflate enterprises portfolios values who then show artificial improvment and are then upgraded by not so "independant" debt auditors like Standard and poors which will allow them again to borrow more at this higher rate (as well as consumers) and then they will begin to racket up the interest rate once more so that the cycle will end by a market correction and even crash depending on where we are in long term cycle.
Quote from hermit_trader:
I don't know what really happened with the employment figures on friday. But I was really shocked by the reaction of the bonds. It was so hugh that even the S&P and NQ couldn't match. Even more dramatic than the cases in Oct 87 and Sep 11th. Why?
The trend is your friend they say and the trend had been for employment numbers to disapoint. Except for one report last year, every employment report had been below expectations. At about 8:25 I had my finger on the button to sell the ZN. But I knew this number could move the market a lot....more than I could justify on risk/reward basis. To me, even though I would have made a killing, it was too much like gambling. But once I saw the reaction, I knew that a lot of people were on the wrong side...they had bet that the numbers would be below expectations and they were wrong. Thats why there was so much movement.
Now the consensus will focus on not IF rates will rise, but when and how much. The worm has turned. If history is any guide, I bet rates go up much more quickly than people expect.
Now the consensus will focus on not IF rates will rise, but when and how much. The worm has turned. If history is any guide, I bet rates go up much more quickly than people expect.
I checked the CFTC's COT, expecting that futures traders were positioned for lower rates. Not the case at all, as shown below. That might suggest that those that were "puking" their long note/bond positions were investors, rather than traders. As pointed out above, the system is leveraged for lower rates, via the borrow-short-invest-long carry trade, which has benefitted the financial industry to the point that it is now the largest component of the S&P 500.
U.S. TREASURY BONDS - CHICAGO BOARD OF TRADE
FUTURES ONLY POSITIONS AS OF 03/30/04 |
-------------------------------------------------------------| NONREPORTABLE
NON-COMMERCIAL | COMMERCIAL | TOTAL | POSITIONS
--------------------------|----------------|-----------------|----------------
LONG | SHORT |SPREADING| LONG | SHORT | LONG | SHORT | LONG | SHORT
------------------------------------------------------------------------------
(CONTRACTS OF $100,000 FACE VALUE) OPEN INTEREST: 508,182
COMMITMENTS
90,262 83,306 8,159 314,115 319,469 412,536 410,934 95,646 97,248
CHANGES FROM 03/23/04 (CHANGE IN OPEN INTEREST: -58,105)
-26,607 5,786 -1,228 -26,400 -63,031 -54,235 -58,473 -3,870 368
PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
17.8 16.4 1.6 61.8 62.9 81.2 80.9 18.8 19.1
NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 155)
32 35 14 57 67 97 110
U.S. TREASURY BONDS - CHICAGO BOARD OF TRADE
FUTURES ONLY POSITIONS AS OF 03/30/04 |
-------------------------------------------------------------| NONREPORTABLE
NON-COMMERCIAL | COMMERCIAL | TOTAL | POSITIONS
--------------------------|----------------|-----------------|----------------
LONG | SHORT |SPREADING| LONG | SHORT | LONG | SHORT | LONG | SHORT
------------------------------------------------------------------------------
(CONTRACTS OF $100,000 FACE VALUE) OPEN INTEREST: 508,182
COMMITMENTS
90,262 83,306 8,159 314,115 319,469 412,536 410,934 95,646 97,248
CHANGES FROM 03/23/04 (CHANGE IN OPEN INTEREST: -58,105)
-26,607 5,786 -1,228 -26,400 -63,031 -54,235 -58,473 -3,870 368
PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
17.8 16.4 1.6 61.8 62.9 81.2 80.9 18.8 19.1
NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 155)
32 35 14 57 67 97 110
Then there are those people who were expecting that at least sometime in 2004 there would be a spike in numbers...
You could see it coming.. Japan started improving, and the Japanese began selling off bonds in late March. It's like a tsunami. Japan had a little "market earthquake" and the tsunami hit the US markets Friday, helped by that little itty bitty thingy they call a job number
But, I'm still skeptical, and I think the Fed needs to wait. Is Ms. Chao's department going to "revise" these numbers? What about next month? With the way IT companies are treating their employees, it wouldn't doubt me that people will still get fired.
So many variables, and I for one am skeptical. I want to see at least 3 months continuous growth before I feel the Fed should move rates. But then again, i'm no Fed economist, so TAKE MY COMMENTS/OPINIONS with a grain of salt.. Add it to the caucophony of other comments.
You could see it coming.. Japan started improving, and the Japanese began selling off bonds in late March. It's like a tsunami. Japan had a little "market earthquake" and the tsunami hit the US markets Friday, helped by that little itty bitty thingy they call a job number
But, I'm still skeptical, and I think the Fed needs to wait. Is Ms. Chao's department going to "revise" these numbers? What about next month? With the way IT companies are treating their employees, it wouldn't doubt me that people will still get fired.
So many variables, and I for one am skeptical. I want to see at least 3 months continuous growth before I feel the Fed should move rates. But then again, i'm no Fed economist, so TAKE MY COMMENTS/OPINIONS with a grain of salt.. Add it to the caucophony of other comments.