T-Bond trading comment (August 31, 2007)

First day in a while where we didn't have an inflow of bad news! We are making progress here. We arrived this morning at our offices with the market ticking down half a buck after challenging (again) and failing (again) on the 112 line. The major part of this fall was on the back of the President G. W. Bush announcement that the government would expand its role to help deal with the subprime problem and the fact that foreign stock markets were gaining ground.

Around 8h00, the market started to catch a bid in prevision of the economic data that was coming out in half an hour. These data points came in on the better side and thge market promptly loss all the wind it had previously gained. From that point on, the market was stuck in some illiquidid range trading pattern until 10h00 when Bernanke spoke in Jackson Hole. Bernanke didn't say anything unexpected, as the Fed is trying to do everything it cans to hold everything until its September 18th meeting. As expected, Bernanke reiterated the fact that the Fed is standing ready for action in case the current liquidity crisis grows into a full grown credit crisis. By the way, now could be a good time for another cut in the discount rate as Libor is still fixing higher and higher and this is no good.

At 11h00, President Bush made his allocution on the subprime crisis. Nothing big their either. They will not help the investors and they will not help the people who bought a house they could not afford, but they will help the ones that have fallen behind in their mortgage payment. Not sure what this means.... If you bought a house you couldn't afford you probably are behind in your payments, so.... In the meantime, the T-bond was still gaining some speed, but this run stopped as we neared the 112 line. Again, the market rejected the breach of this resistance and went slamming back down... We closed at 111-20 on diminishing liquidity.

Next week, we have two things to look at. NFP and ISM data points. This should give or take some confidence to the market.

T-Bond trading comment (August 30, 2007)

Well the bad news just keep coming our way.... Where do we start ? West LB lost 604 mln on bad trades, Lehman is rumoured to have big problems, a bank has borrowed 1.6 bln pound at 6.75%, the president of S&P has given his resignation, credit indexes are getting wider and Deutsche Bank is firing everybody from its credit trading London team amid rumours of 100+ mln euro loss... In addition to all this, the rumour mill is churning like crazy.

The two biggest rumours of the day were: the big five US investment banks firing credit trading teams after the long week-end and some crazy trading in deep in the money calls striked at 700 and expiring on september 21. The rumour wants it that it is a terrorist group playing there while preparing a massive attack on the United States... I must admit this is not the easiest way to do that but who knows... When we look at the open interest on SPX options the 700 strike open interest is huge.... But again I am not an expert on stocks.

On the liquidity front, the days pass by and look alike... Libor still ticking up (not good, really not. This could shed a lot of blood on the street), swap spread curve still inverting (again, this is also a sign that something smells foul) and hearing more and more people just throwing the towel in submission....

Today we had a pretty uneventful day on the T-bond as the market ticked up on increasing fear of a more serious problem in the market. Tomorrow we have PCE data, Chicago Purchasing Manager and University of Michigan. Also even if there is no Q&A session tomorrow, Bernanke is going to talk at 10h00 AM and he will maybe shed a bit of light on how he sees the situation in the market... So stay tuned...

Half day tomorrow !!!

T-Bond trading comment (August 29, 2007)

Well it looks like the 112-00 area will remain a resistance for the foreseeable future. Early in the session, we tested thrice the resistance and thrice the market fell back on a lack of momentum. No economic news were due today and we only had a 2 years auction that went pretty well by the way with a nice bid to cover ratio. We arrived this morning after having already challenged twice the 112-00 level with Asian stock markets getting killed and European's slightly up the market was ticking up a bit.

Until 10h30, the bonds just mirrored the Dow Jones... When the Dow went down the bonds went up and vice-versa. This lasted until the stocks caught a bid to overrun the 1% daily gain. At this point, the bond market did not fall by as much as it was supposed (looking at the earlier activity). This is probably due to the fact that the market is still scared by the liquidity crunch. Afterwards, we started to drift lower as equities kept getting stronger and people relaxed about the liquidty crisis. Talking about this, the Libor is still fixing quite high and this is not good because it kills funding activities.

Continuing in this vein, Bernanke noted this afternoon that "FOMC said it's ready to act as needed". Nothing new here, but the market don't seem to listen...

Tomorrow is going to be an interesting day. We have GDP and core PCE data.
Both these datas will be important as the first will give an idea about growth while the seond data point will shed light on inflation.

T-Bond trading comment (August 28, 2007)

Another summer day passed by and is now gone. Liquidity is coming back slowly to the market but with the roll week, the long week-end coming and school starting soon there still is some liquidty issues... Although, liquidity is getting better. We arrived this morning at the office, with a slight bid in the market as State Street was rumoured to be in trouble on ABCP holdings... The market started to fly upward before falling back again. This fall was a bit dubious since the rest of the market was holding its ground. The most probable answer to this behavior is people putting on more steepners... Other answers are possible ( like future inflation higher, big sellers of 30s, big deal getting priced) but I think a bit unlikely. After reaching the 111-10 line, the market stayed pat and waited for the stock market to open. The Dow opened on a weak note with added pressure on financials (following what was happening in Europe where big banks were getting hammered). In sympathy with the stock market and increased fear of a worsening of the current crisis, the whole debt market went up... After licking the high 111s, the market stabilized himself around 111-21 for the rest of the day.

Looking at how the TUs, FVs, TYs and USs moved today, it was pretty clear that people were putting steepners on again. Five and ten year notes were up more than half a buck while long bonds were lagging... If this is any indication of what the market is expecting for the future, I think it is pretty clear that traders are expecting that the credit/liquidity crisis is set to continue.

Talking about the crisis, it looks like more news are coming on the negative side. More specifically, housing data shows no sign of improvement, two years swap spread jacked up again today, Libors are ticking up and more money market funds are running into troubles. This could set the table for a prolonged crisis that in the worst case could lead to a recession... In addition to all this, credit indices (CDX and Itraxx) are drifting higher on low volumes.

Last item worth of noting for today was the Minutes of the August 7 meeting that were due at 14h00. The Fed didn't say anything unexpected. Basically, the Fed reiterated the balance between the actual credit crunch and possible inflation in the future. The only twist was that the Fed maybe shifted their focus a bit more toward the actual crisis. The Minutes put a bid in the market but with little conviction...

The week ahead

Sorry, I have not been very assiduous lately. To my defense, I had logistical problems added to more pressing matters...

In any case, here is a quick heads-up. First on the economic front, we have a fairly quiet week ahead of us with fed minutes and GDP numbers... GDP numbers are expected to be stronger. This could make the balance tip to the bear side for the T-bonds. Secondly , on the credit/liquidity crisis side things are getting better. The Fed is continuing to add liquidity to the market through diverse means and several players are now actively buying bank papers. Finaly, credit indexes have stopped climbing and are actually going lower... Thirdly, about the prime market of interest here, people are coming back from vacation and this is adding liquidity to the market!

Right now, the T-bond seems to have clearly breached the 110-00 line. But beware, a couple of foreign long bonds look overextended to the bull side and in addition to that the stock market seems to be developping a new bullish channel... All of this, would tend to indicate that the short side should be advantaged... In the meantime, the 21 days moving average is holding like a rock.
Also, do not forget that we are in the roll week. We are going into the USZ7.

T-Bond trading comment (August 22, 2007)

Another very poor liquidity day! Plus we are still very close to our 110-00 line. There is only two days left before the options expire. Reports on the credit market are still very ambiguous. On one hand we have some reassuring news, saying that subprime problems in the UK are just rubbsih and everything is going to be okay and on the other hand we hear the exact opposite regarding the UK and several big players in the US are closing their subprime lending arms. Just to name a few, Lehman Brothers, HSBC, Accredited, Delta Financial.... Also Quality Home Loans filed for bankruptcy joining an ever growing number of lenders who failed to survive.
In addition to all that, we have some sustained rumours that the Fed is going to cut again the deposit rate.

So in few words, the market seems still uncertain which side to pile on, but the short side is gaining some weight with lower swap spreads, deflation of the EuroDollars' bubble and buying of corporate paper.

T-Bond trading comment (August 21, 2007)

Liquidity was a bit more present today but nothing to get too excited. We entered the market this morning with some wild rumours that the Fed was going to cut rates today... This was coming from Europe and was apparently started by Goldman Sachs. The Fed was supposed to announce a cut while Bernanke met with Dodd and Paulson. The big problem with this theory is that if Bernanke had cut the rates following the meeting, it would have greatly undermined the legitimacy and the independence of the Fed. As expected, the outcome of this meeting was simply to reassure the market that the Fed was well aware of the problems in the market and that it was ready to act if needed. When the speech came out, the market started to tank as equities took some altitude. But differently to other days, we did not burst through the 110-00 line... The fall was met at 110-07 with some agressive bidding and the market went up afterwards. Trend followers should have have an average day with some good and bad signals. In this context of low liquidity, the market still heavily followed the stock market.

An interesting point to take into account today, is the fact that there is some players that started to scoop up some paper at what they believe are rip-off levels. The important thing is not are they right or wrong? The important thing is that this might engender a following and force the market to that we are not yet in recession and that growth and consumption are still there (well for the moment). In short, there is no need to panic and get slaughtered like pigs.

Except for claims on Thursday, there are no economic news until the end of the week

T-Bond trading comment (August 20, 2007)

Ok we are still in the summer lull. Low volumes, low bid and ask quantities even at the peak of the day and illiquid trading patterns. After friday's indecisive trading session, we were due to see a little bit of movement today... Trend followers must have been happy today with nice, clear trends. That is, of course if you were not spooked off by the low liquidity or on the beach drinking a margarita. After testing lows in the wee hours of the day, we started to trade higher as equities were unstable. After that, the market really picked up as equities were giving ground on more credit risk news... Noise in the market, that certain mortgage shops cannot trade derivatives anymore on concern that they will not be there in a few months... Also, there is some noise about the canadian commercial paper(ABCP) crisis coming to the US and Europe. If that is the case we could see more trouble in the near future... Just a reminder: There is ten times more ABCP in the US than in Canada. Not pretty....

We are again closing very near to the 110-00 level, with friday's option expiration looming and no economic news on the tape we might stay put at 110-00 until Friday as option seller will want to keep it right there. In conjunction with that, we saw this morning some heavy bids/offers (well heavy given actual low volumes) stay there and try to keep the price around the figure.

T-Bond trading comment (August 17, 2007)

The fed cut the rates today!!!! No don't get too excited it is only the discount rate not the real one.... At 8h17 the Fed came out on the tape saying they were reducing the discount rate by 50bps to 5.75%. The initial impact was a slight bid in the market, but pretty fast the market changed way and we encountered a black hole where every bid was just sucked down.
We lost about a buck in an hour but mainly we lost 70% of it in 10 minutes.

After that, the market caught a bid for almost a buck as the stock market after initially climbing started to give back a bit of money. By eleven o'clock the books were closed and peoples were thinking about that fresh beer waiting for them at the nearest bar. After a week like the one we just had, a think several beers will be looking pretty nice.

We are still in the summer days with very poor liquidity. In normal times, we commonly have 13 000 on each side of the market, right now there barely is more than 5 000 on each sides and even that seems generous. Otherwise than that, we are still hugging the 110-00 line and there is no major economic news next week, but we do have option expiration on Friday...

T-Bond trading comment (August 16, 2007)

Today was not interesting from a trading standpoint. We just stupidly followed the stock market as can be seen in the above picture... So if you wanted to trade, just trade stocks...T-bond market was strictly driven by stocks which in turn were driven by credit crunch fears. Today, we heard all kind of rumours... Hedge funds in big problems, bankruptcy of big banks, Fed cutting rates ( actually, at one point this afternoon the eurodollars were up by 25 ticks !!! This means that in one day we priced a whole rate cut.... It came back afterwards) and all kind of other weird panic-striken thoughts...

But in the end, I cannot help but think that we saw some major improvements in the market today. First, the ABCP crisis seems to be resorbing as the major Canadian market players agreed to transform the commercial paper in short term notes to help everybody calm down. Secondly, bad news in the housing market are a bit more positive.... Yes we still have negative news but we also have good news, like Moody's affirming that Countrywide had sufficient liquidity to face prolonged headwinds. After the news, the stoks soared more than 26% from an intraday low. Thirdly, we are starting to hear other news than credit crunch related news. Granted, the non credit crunch related news flow is still low but at least peoples are starting to look at other things. Lastly, did you take a look at how investbanking stocks did today... People might be regainning a bit of confidence...

We are done with big economic news for the time being. Tomorrow we only have University Of Michigan and after that we are on week end.

To resume today's heird panic. The market was as intelligent as the least intelligent participant in the market...

T-Bond trading comment (August 15, 2007)

This was an interesting day today. We are down 12/32 over the day and plenty of action went on today. We arrived at our desk this morning playing with th 110-00 line and guess what, we again rejected it. The market afterwards braced himself for a rather stronger CPI since yesterday's PPI was a bit stronger. But the CPI got out exactly as expected and apparently the major part of the difference between the PPI and CPI was due to different ways of measuring inflation...

At the same time, the stock market was looking to go higher and so we went lower in the T-Bond. From that point on we hitched lower as the stock market climbed. A low of 109-11 was reached when the stock market started to puke nad we promptly went higher but this time the T-bond showed a bit of self desire and went back down as people are putting on steepners or taking off flattners. This movement is pretty evident as the T-note and five year notes both climbed 8/32 while the T-Bond is losing 12/32... People selling the long end and buying shorter maturities. This means that market participants see that the Fed will cut rates in the near future... By the way, eurodollars are pricing rate cuts...

Tomorrow, we are having housing startsand Philly Fed... Philly Fed should go through the roof if it follows today's Empire Index.

The Big View: Is it time to prepare our shorts?

What is new since our last look at the bigger picture?
Well not much, we still haven't overrided the 110-00 defense line and we haven't really moved as shown in the graph. Bu since last time, three things have changed a bit:
1 - We are dangerously close to the montly moving average. We haven't gone trough it but we are really close
2 - MACD has turned negative and if you look at it lately, you will notice that it has been pretty good lately at picking turning points
3 - Open interest is lower. Maybe it just market participants starting to roll in the new future but maybe not...

Of course against that we are right now in the middle of little credit crisis that if is not solved could send everything (except stocks of course) a lot higher....

T-Bond trading comment (August 14, 2007)

Well, all eyes are clearly on the stock market and more specifically on the financial sector ! Today, we had more bad news related to mortgages and ABCP from Citigroup, Sentinel, Lehman, Bear Stearns and Goldman... Just to give an idea, since mid july, the banking sector in the S&P500 has lost just over 22%... And this is just in North America, overnight there was also noise from Societe Generale in Europe after BNP Paribas last week. Finally lets not forget that in Canada, we are living historical moments as ABCP conduits are facing huge problems, since no investors want to buy their commercial paper.... This means that they could default and force the unwinding of huge CDO positions.... Can you spell credit crunch?

In any case, this morning we opened slighlty lower than were we had left the market last night and we went to revisit the low 109s has PPI got out stronger for the global reading. Afterwards the stock market opened and started to crash so as we have done in the last few days, we started to go back up in support. There was one nice trading opportunty for trend followers this morning when the stock started to go down otherwise it was pretty calm.... Again volume was slightly off today as a lot of market players are staying on the sidelines or simply enjoying the summer sun.

Tomorrow we have CPI numbers to look at and NAHB index. I think it is safe to say that with all the bad news in the housing sector we shouldn't see any major recovery in the index tomorrow....

T-Bond trading comment (August 13, 2007)

It is official, we are in the swamp where nothing trades. Today, we had less than 275k T-bonds which traded. This is low. In spite of this low volume there was several opportunities for people trading off the stock market as we again mirrored to the perfection what was going on on Wall Street. For trend traders we only had one nice opportunity this morning when we started to break out of the bottom of the day.

For the next few days, we might experience some low volume as we are hitting the height of the summer vacations. Also something else to keep in the back of our mind is that there is still some possibility for more negative credit news, but right now the only thing we are hearing on the wires is that we are now seeing tremendous opportunities and that we are over the worst part of the credit crunch.... We will see.

The week ahead

Next week, will be quite heavy in term of economic news. On Monday morning, we start with retail sales then on Thursday and Wednesday we have PPI and CPI. In addition to that, we will also have housing data as well as the Empire survey and the Philly Fed.

But the big question is, will the credit market tremors continue next week or have we stemmed the flow for now? Last week, the market was roiled with bad news from everywhere (ie: investors, banks, lenders...) to the point that the FED and the ECB had no choice but come in the market and lend money in order to avert a liquidity crisis. For now, the market seems to have taken the bait and calmed down but what does the future holds , we don't know.

T-Bond trading comment (August 09, 2007)

People looking for volatility should have had their fill with today. We arrived at our desk this morning with the BNP booboo putting a bid in the market, altough when we arrivd the move was already done. After that, the T-bond traded in an 8 point range until another rumour fired up the market. This time it was a large UK bank having to report huge trading losses. Since it was only a rumour, the market hedged lower afterwards with the market bracing itself for the auction. After yesterday's auction, today was not looking good especially as the last long bond auction was not good.

In the end, the auction was a disaster... Looks like peoples don't want to touch T-bonds even with a pole... Indirect bidding was a paltry 7.8% where as normally it is around 30-60%. When the results got out the market went crashing down almost half a buck, but a big bid entered the market at 108-26 and said enough we are going higher. From that point on, the market hedged slowly but surely toward pre-auction level while stocks started to get seriously hammered. Tomorrow, we only have import prices at 8h30.

The market seems very hedgy right now, as a constant flow of rumours hit the market. In the past 24 hours, we've had Goldman's profit warning, Goldman's Alpha fund unwinding, Goldman's hedge fund trading losses, Citadel liquidity issues and UK bank trading losses. In addition to these, we've had several verified facts among these, BNP, Bear Stearns, and JP morgan's hedge fund loosing 11% in August alone.

T-Bond trading comment (August 08, 2007)

Finally, we have an interesting morning with some very nice opportunities for short term and longer term trend followers. We arrived at the office, with a market already quite depressed by news that the Bank of England was ready to increase rates to 6% with no significant economic news or speech in the morning we drifted higher with a clear buy signal at 8h29. After that, we evolved in a narrowing range until we broke the 109-16... Again just before beraking this support, we had a nice sell signal. Next interesting thing, was the 10 year auction that didn't go that well.

This coupled to a soaring stock market cracked the bid side at 108-28 which acted as a resistance afterwards. This resistance held until a rumour (later denied) that Goldman Sachs was going to issue a profit warning and the Dow slided from +180 pts to -12 pts. The rumour put back a bid in the T-bond and we traded higher finding pre-auction level. Not to forget that tomorrow, we have the T-Bond auction which should keep the T-Bond under pressure until then.

Looking at a bigger picture, we can't help noticing that we are assisting to a releveraging of players as swap spreads litterally crashed this morning and the market shrugged off, at least temporarily, housing problems. A consequence of this is that the t-bond as now violently rejected the 110-00 line. Our next trading targets are now more to the downside than the upside. Next point is 108-05, which is the old resitance line for the upleg done between mid-june and mid-july.

T-Bond trading comment (August 07, 2007)

Another "q" day! We had a super range of 5/32 during almost 3 and half hours.... So interesting... It is not my style but was reduced to offer at the top of the range, bid the bottom and cover in the middle. Don't like doing that. The interesting part of the day was when the Fed came out on the tapes. As expected, the Fed still seems to worries more about the inflation than about growth accordingly the market went down but was bid right after. The reason for this move was a bit mysterious to my knowledge, but the move was instigated by equities that were puking like there was no tomorrow. This unexplained sharp move reversed quite rapidly and we resumed our descent. There was a sell signal when we broke the 110-02 suuport and went on to lose half a buck... Afterwards, the market calmed down and guess what? We went back up to hug to our 110-00 line... So we still haven't broken one way or the other from the 110-00 area, but swap spreads continued there downward move today, so we might experience lower prices in the near future...

Point of interest: After the Fed released its comments, almost everybody scowled against it saying that the Fed was wrong and they should be looking a lot more closely to what is happening in the housing market.... In fact, even before the release, there was a piece of news from Merrill Lynch stating that the Fed should cut rates by 75-100 bps.... Interesting to see what will come out of this. In any case, the clash means potential volatility !

T-Bond trading comment (August 06, 2007)

Well it is pretty clear we had a "q" day. Nothing going on in the morning and a good down movement in the afternoon. We spent the major part of the morning stuck between 110-18 and 110-13 on pretty light volume. Contrarians thrived this morning while very short term trenders showed a flat to silghtly negative PnL. Longer intraday trenders had an awful morning but better afternoon. Each time, we reached the 13 area, sellers would die away and buyers would come again and the reverse near 18.... This lasted until 12h47 when the stock market started to soar. At that point, we broke through 110-12/11 and went on to visit the low 110.

At the same time, swap spreads were getting hammered.... This last piece of news is quite interesting as it indicates that the market is depricing the risk associated with a subprime crisis (to the contrary of what Jim Cramer of CNBC thinks....). If this is true, we could the see much lower prices in the coming days.

Tomorrow, the big news is in the afternoon with the FOMC rate decision. No movement are expected but it will be interesting to see how does the Fed balance the subprime meltdown with inflation.

The Big View: Still higher? ehhh not sure....

I am back from holidays and we are still following the stocks and we are still struggling with the 110-00 resistance line after a momentary break on Friday thanks to a weaker NFP. Today, we lost approximately half a buck going for 110-00 but were not able to break it. The picture is looking less and less good as we are approaching top points on several markets ( Bunds, T-Notes, CGBs just to name a few). This does not bode well for the current rally. Also, we must not forget that we have T-note and T-bond auction this week which could put a lid on any run-up in prices.

In the end, to resume ourselves, we are still waiting for a clear pull away from the 110-00 area but we are getting cautious as the picture is getting murkier....

The week ahead

Next week is relatively light in terms of economic data, with the FOMC rate decision on Tuesday being the focal point. Also, we have T-Note and T-Bond auctions on Wednesday and Thursday which should keep some pressure on prices until then, unless we have some other bad news in the mortgage market.

The 110-00 resistance in the T-Bond seems to have been broken decisively on Friday with weaker than expected job data. Now let see if this is just a slight over-extension or a real rally!