Yield Curve more or less flat

Quote from DeepFried:

Excellent posts, doc & BH. Thanks.
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Indeed!
This is by far one of the best threads on ET in a long time.

It sure beats those "pissing" contests that that guy Rubberbird gets into in his typical
"I'm the greatest market caller ever!" thread in the Trading Forum.

:D
 
Greenwich Capital calling for -40 basis points in the 2-10yr spread by mid 2006 and a 3.75% 10yr note. At that point the mortgage convexity hedgers will be in control (rather than the extension guys at higher yields). The path of least resistance seems to be towards continued flattening regardless of another Fed move. Think of it this way, if so many people still have the flattener on and the Fed has explicitly stated that the predictability of the curve inversion in terms of recession has weakened, then they are giving the okay to the banks to push it there. Although they have issued their warning statements in terms of low risk premiums (so don't be suprised if a massive steepening and huge blowouts are met by a "We told you so" by the Fed). On top of that, the big steepener trades are gradually being unwound (i.e. Pimco), which tells you that they were put on a little early and maybe after January is the best time to put them back on. Will be interesting to see if convexity guys come back into the 10yr around 4.30% or so (heard as a level) and if they do the magnitude of the push past that level should be fairly strong (since majority in JP client surveys neutral to short), will either see massive short covering or neutrals unwilling to step in and get short size.
 
Quote from mcurto:

Greenwich Capital calling for -40 basis points in the 2-10yr spread by mid 2006 and a 3.75% 10yr note. At that point the mortgage convexity hedgers will be in control (rather than the extension guys at higher yields). The path of least resistance seems to be towards continued flattening regardless of another Fed move. Think of it this way, if so many people still have the flattener on and the Fed has explicitly stated that the predictability of the curve inversion in terms of recession has weakened, then they are giving the okay to the banks to push it there. Although they have issued their warning statements in terms of low risk premiums (so don't be suprised if a massive steepening and huge blowouts are met by a "We told you so" by the Fed). On top of that, the big steepener trades are gradually being unwound (i.e. Pimco), which tells you that they were put on a little early and maybe after January is the best time to put them back on. Will be interesting to see if convexity guys come back into the 10yr around 4.30% or so (heard as a level) and if they do the magnitude of the push past that level should be fairly strong (since majority in JP client surveys neutral to short), will either see massive short covering or neutrals unwilling to step in and get short size.
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I read about Greenwich on the bloomy this morn, I think the dealers are divided thou, which is frankly putting me to sleep if anything... 4.30 sounds VERY ambitious but hey I never expected it to go below 4 a few months ago, the market has the tendency to overshoot...
 
PIMCO getting out of more short bonds today, about 5000 bought in the pit and another couple thousand at least on the screen. Looks like good time to wait on those steepeners.
 
Quote from mcurto:

PIMCO getting out of more short bonds today, about 5000 bought in the pit and another couple thousand at least on the screen. Looks like good time to wait on those steepeners.
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You must've been the one out of the 30 traders on the floor today...
 
Yep, was definitely thinning out slowly as the day went on, that was a surprise though with Pimco coming in with such big size on a day they knew it would be thin. The craziest thing was they bought 5000 30yr bonds in the pit, and only moved it 3 ticks, even on the most liquid day I would tell you there is no way you could even get off half of those bonds within 3 ticks, pit or screen.
 
Very nice comentary.

Question: If we're going inverted (which I believe we are) why have banks run like hell? Are the hedgies just wrong on that bet, or early...or late...or what?

I know a lot of rather sophisticated Mortgage Bank owner types that I know (who play the curve) are sweating bullets.



Quote from mcurto:

Greenwich Capital calling for -40 basis points in the 2-10yr spread by mid 2006 and a 3.75% 10yr note. At that point the mortgage convexity hedgers will be in control (rather than the extension guys at higher yields). The path of least resistance seems to be towards continued flattening regardless of another Fed move. Think of it this way, if so many people still have the flattener on and the Fed has explicitly stated that the predictability of the curve inversion in terms of recession has weakened, then they are giving the okay to the banks to push it there. Although they have issued their warning statements in terms of low risk premiums (so don't be suprised if a massive steepening and huge blowouts are met by a "We told you so" by the Fed). On top of that, the big steepener trades are gradually being unwound (i.e. Pimco), which tells you that they were put on a little early and maybe after January is the best time to put them back on. Will be interesting to see if convexity guys come back into the 10yr around 4.30% or so (heard as a level) and if they do the magnitude of the push past that level should be fairly strong (since majority in JP client surveys neutral to short), will either see massive short covering or neutrals unwilling to step in and get short size.
More...
 
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