The curve is at an interesting point right now, with some big players also jockeying around positions at the end of the year. Lately PIMCO has been taking off their FOB stepeners in size, last week about 70,000 x 25,000 on the futures side and who knows how much on the cash side. I think their perspective on this is that risk premiums are not yet about to increase, so why be short the 30yr bond. There is possibly better value in say 20yr TIPS (with inflation as low as it is, possibly the low print we will see for some time on Thursday) than the long end at these levels. Obviously people also aren't worried about a massive unloading by the foreign central banks quite yet either. There should be massive demand at the 30yr auction beginning in February from the pension funds, so I would assume after that, and Big Ben is begninning his reign as Fed Chairman, is a good time to put on the steepener. Until then, I think any steepening in the curve is a good spot to put on a flattener (even at these levels) and ride the wave until the Fed finishes their campaign or as the economy continues with average growth but no inflation. The Fed is puzzled by the low yields in the long end and doesn't seem to mind the curve inverting at this point.
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Yield Curve more or less flat
- Thread starter The Kin
- Start date
Quote from trade4succes:
ok i did a little research myself. isn't it usual banks lend "long" money and borrow short?
In that case a yield curve going inverted should indeed mean bad news for banks. I am not sure that's all there is though. and the reason why the guy was buying banks on the rate cut is because the short money suddenly got very cheap for the banks.
I work for a bank and indeed it is very bad news when we go inverted. The reason why financial services have jumped, in my humble opinion, is that investors feel the fed is almost done raising, in which case a steepening due to a lower yield on the short-end will be good biz for the financials.
Quote from mcurto:
The curve is at an interesting point right now, with some big players also jockeying around positions at the end of the year. Lately PIMCO has been taking off their FOB stepeners in size, last week about 70,000 x 25,000 on the futures side and who knows how much on the cash side. I think their perspective on this is that risk premiums are not yet about to increase, so why be short the 30yr bond. There is possibly better value in say 20yr TIPS (with inflation as low as it is, possibly the low print we will see for some time on Thursday) than the long end at these levels. Obviously people also aren't worried about a massive unloading by the foreign central banks quite yet either. There should be massive demand at the 30yr auction beginning in February from the pension funds, so I would assume after that, and Big Ben is begninning his reign as Fed Chairman, is a good time to put on the steepener. Until then, I think any steepening in the curve is a good spot to put on a flattener (even at these levels) and ride the wave until the Fed finishes their campaign or as the economy continues with average growth but no inflation. The Fed is puzzled by the low yields in the long end and doesn't seem to mind the curve inverting at this point.
That's exactly how I see it!! I"m not putting too much weight on anything right now with the holiday season upon us, but by the next Fed meeting if we don't see this unfolding I may need to change my opinion on things
Quote from mcurto:
The curve is at an interesting point right now, with some big players also jockeying around positions at the end of the year. Lately PIMCO has been taking off their FOB stepeners in size, last week about 70,000 x 25,000 on the futures side and who knows how much on the cash side. I think their perspective on this is that risk premiums are not yet about to increase, so why be short the 30yr bond. There is possibly better value in say 20yr TIPS (with inflation as low as it is, possibly the low print we will see for some time on Thursday) than the long end at these levels. Obviously people also aren't worried about a massive unloading by the foreign central banks quite yet either. There should be massive demand at the 30yr auction beginning in February from the pension funds, so I would assume after that, and Big Ben is begninning his reign as Fed Chairman, is a good time to put on the steepener. Until then, I think any steepening in the curve is a good spot to put on a flattener (even at these levels) and ride the wave until the Fed finishes their campaign or as the economy continues with average growth but no inflation. The Fed is puzzled by the low yields in the long end and doesn't seem to mind the curve inverting at this point.
Thank you. That was a useful post.
I agree with the point on the TIPS - great time to buy if you are willing to deal with anemic returns for a while. If things ever really go deflationary, then you don't really lose too much. Just expect to hold for a while. Maybe a long while, if you are not trading size. I suspect I am trading much smaller than you, so my horizons/goals are different.
I'm about ready to crap out on my short long bond position for now. Seems like there will be a better time to put it back on.
I wonder if we are going to be going into an extended period of flat yield curves? Bizzare. Something will eventually happen to shake that up.
Agreed. I think by mid to late 2006 something will happen in terms of bond market volatility. At that point we will have been under Bernanke for about half a year and hitting possibly the end of our growth cycle while Europe and Japan are chugging along solidly. There are two enormous positions that come to mind that expire right around the end of February and March. One of them is in Treasury options, someone (still not sure who) is long about 120,000 March 102 puts in the Ten year options (put on at least a month ago when tens were around 108 handle or so). My guess is this is the bond market doomsday scenario where the Fed has lost all crediblity and inflation is beginning to get out of control. The other position is in Eurodollar options, the Graham Fed Policy guy is essentially buying Feb 9512 puts and selling Feb 9525 calls (140,000 x 100,000) and selling March 9512 puts and buying March 9525 calls (70,000 x 100,000). This scenario is the Fed continues to raise rates Greenspan's last meeting and then he thinks Bernanke is on his own the first meeting and will probably not raise rates thereafter. The size of the positions being put on in these months means we have to be at some sort of turning point in volatility with so many different opinions.
Quote from landboy:
The curve is inverted in the short stuff... We got the closest today as any to TUT inverted, FIVE basis points. No need for another rate hike, even if the fed stayed put it looks like the Street wants to push it that way... Anybody else have a flattener on?
5 basis points lol. I dont have my chart software at home but if i remember correctly the spread moved alot the last week of the year in 2004.
Have An Inverted New Years!