Honeymoon

Please note that I am taking a three week honeymoon and consequently, there will be no post made in the meantime!

I will be back on November 5th.

Cheers

T-Bond trading comment (October 10, 2007)

Another indecisive day ! After trying new lows in the morning session, we reversed the bets but failed on the 111-03 threshold. Afterwards, we slowly drifted back toward the opening price on low volumes. Pretty early this morning, the market tried new lows and we did break through the 110-18 level but the move was not very convincing and in addition to that stock future were getting a bit tatooed and we promptly went higher. This leg to the upside was pretty easy to forecast and many people jumped on the band wagon.

Beginning of the afternoon, we arrived at yesterday's high and resistance for the last three days at 111-03/04. This was the signal to take off the longs (personnally we took them off much earlier and much lower ) and see what the market had in the stomach. In the end, we failed to the upside as we failed to the downside in the morning and retreated to our opening price for the close. Short vega players are happy as volatility has been crapping out for the past week.
Tomorrow we have import prices as well as claims and monthly budget statement... Nothing overly exciting.

T-Bond trading comment (October 9, 2007)

Funny day. For those of you who though we would have a follow-through day got it wrong. We finished flat ! Although we didn't have a follow-through, today's pattern was not overly surprising. After the monster move of Friday, we assisted to a consolidation day. Early last night we unsuccesfully tried the lower support before bouncing slowly upward until we hit the first significant support we met on Friday which today served as a resistance (111-04). After that the market readied itself for the FOMC minutes. Minutes were slightly bullish and market started to tank but pretty fast we saw T-bonds stop the bleeding while shorter maturities were not able. This is indicative of flattners being put on and this theory is consequent with what we hear from bond desk around the place trying to convince everybody it is time to put flatners on. In the end, we closed at 110-26 up 1/32.

Talking about the FOMC minutes, they shed a bit of light but were somewhat disappointing. One thing clear, the rate cut was unanimous and done in order to stem a possible recession. For now, the fire seems to be tamed on the recession side but is the inflation fire tamed? The Fed thinks that yes right now inflation looks to be under control but the Fed does not seem to have a lot of control over anything... In any case, the important message to keep in mind after this text is that the Fed looks to be on hold for a bit of time. Consequently Euros went down and curves flattened....

Tomorrow will be a calm day on the economic side, but it will be interesting to see if the market is able to break throught the support we created on Friday at 110-18 and on which we chocked today. If we do break it, the next target is the 110 figure level

The week ahead

Short week this week for fixed income traders! The week is relatively calm in terms of economic data except for two things: 1- FOMC minutes on Tuesday and 2- Retail sales on Friday.

The minutes are avidly expected, because everyone will want to know why the Fed cut rates by 50bps and especially how important was the -4k NFP in August in the decision to cut rates. We will remember that the market was expecting a 50bps cut and that is exactly what the Fed did, but it is a bit unclear why they did so. Sure there was continued problems in housing, the liquidity crisis and the poor job report, but was there something else? In any case, some light will be shed Tuesday afternoon!

Retail sales on Friday will also be of interest to take the pulse of the consumers. A slight pick-up is expected after the disapointing September number... Year to date, the numbers have been slightly mixed...

Of secondary interest in the economic arena, we also have 10y tips auctions, consumer sentiment, PPI (let's wait for the CPI), import prices and business inventories.

Looking at the T-bond, the big challenge this week will be to break below the 110-00 level if we want to continue on Friday's venture. Otherwise, to the upside we are still looking at the 112 area.

T-Bond trading comment (October 5, 2007)

That was a real curve ball that a lot of people did not see coming! NFP up 110k and revision of +93k for the preceding month ! Evidently, T-bonds got trashed... Two months ago, I underlined the importance to not take face value on NFP data... Basically, the error margin on the NFP is something around 70k and this month we've had the perfect example with a 93k revision sending the market in turmoil with people scrambling to re-evaluate their view of the economy. Let's just hope that the Fed did not put too much weight in August's NFP to cut their rate... In any case, unless very adverse economic conditions come in the very near term, it is safe to say that the Fed will probably not move for the rest of 2007!

So the 112 line looks a bit far from the 110-25 line. After playing with it for the past week, we have cleared away on strong NFP data. Until the number, the market did not want to move away as it did not knew were to go. After that, it was all the way down except in the last hour and half of trading were people were just covering their shorts for the long week-end. In terms of trading, you just had to be short. Our intraday trend model gave us the tip (believe it or not) 1 minute before the NFP. The model covered just before the final bell on the little pick-up. That was the good trade. The bad trade was our swing trading model that was bulllish coming in this morning... The cost was over a buck today and wiped out just over a third of the yearly profit on this model... Not good. Better chance next time.

The option corner

Two points:
1 - The iron butterfly we've put on Monday is high in the sky after today's NFP data. For now, we have been very lucky this month as we have sold our 111 call on the 2nd of October after reaching the 1$ target move. Now, the lower the T-bonds close on the 26th the better it will be! Although, don't celebrate yet... We are still early in the month and a rally is still possible.

2 - Options are still expensive, yesterday we were looking to buy a November straddle and were in the end deterred of doing it... Too expensive. Good thing we did not do it. The 111 strike lost money and the 112 one barely moved up by a paltry 4/64....

T-Bond trading comment (October 3, 2007)

For now, the 112 line has held on a daily close. After testing new highs in the morning, we broke the 112 line and held there for the rest of the day, even if for the close we made a half hearted try to reach again the resistance level. All morning long we bounced on the 112 level, but never did we overpass the 112-10 level that also contained yesterday's push. ADP numbers came in as expected and at 10h00 ISM non manufacturing came in sligthly stronger. This sparked some bid in the equities and credit indices as people momentarily forgot about the ongoing liquidity/credit crisis. As expected, bonds went on to visit lower levels and there we broke the 112 line. test

We lost almost half a buck between 10h and 12h before the bids started to disappear in the equities and from there we started to climb back. But this attempt to close over the 112 line failed and afterhours we resumed our descent... On Friday, we have NFP and there is a theory going around stating that Friday's NFP will be higher. The rumour says that due to technical problems the September NFP was missing 30k and that they will be added to this month number, hence the expected stronger number.

T-Bond trading comment (October 2, 2007)

Okay we have overpassed the 112 line but for now, this passage does not look too convincing. In fact, we closed the day barely over at 112-01 after trying higher highs and failing on heavy offering. We arrived this morning with the T-bond being hit as European equities were on fire after yesterday's Dow Jones performance. While waiting for the pending home sales, we had some interesting range trading comprised of yesterday's support at 111-16 and 111-25.

At 10h00, pending home sales were out and worst than expected even after last month monster loss. As expected, this sparked a rally toward the 112 line. After a bit of hesitation, we went through and went up to the 112-10 level. This was the perfect level to sell our 111 call since the market had moved by one dollar since we put on the trade... yesterday (Historically, it takes a bit more time to reach the 1 dollar level). In the perfect world, we would now want to see the 112 line holds its ground and send the T-Bond lower... We will see in the coming days.

We are getting closer to Friday and the NFP... The market is pricing a +98k which is pretty strong, if we come under that we could very well open the door for higher prices. By the way, the CGBs and the Bunds have both cleared their configuration for higher prices. Their targets are about 2 bucks higher each. Stay tuned for the US...

T-Bond trading comment (October 1, 2007)

It looks like we are pulling away to the upside... But beware, we haven't passed the 112 mark which is a resistance line as well as the monthly moving average. We arrived this morning at our offices while the market was trading unchanged after an earlier challenge to the upside. With no specific data before 10h00, the market drifetd aimlessly in a little range on low volume... At 10h00, we had ISM indexes, they were a tad lower and this gave some fuel to the bulls to run-up prices but we failed at the 111-26 line. After that, we drifted back lower to sit on the preceding top, made just before 10h in the 111-16 zone. This support holding, we tried again to the upside but with the afternoon coming to an end we failed on the 111-28 line which, by the way is the level on which we failed on Friday... 112 seems to be a bit tough to overpass right now.

So what is in the books for tomorrow ? On the economic front, nothing big with only pending home sales. But equities have closed at a record high (Dow Jones) and we have the 112 line standing in front of the bulls, so let's say that right now the odds are skewed to the downside...

Today was the first trading day of the month, this means it was time to put on iron butterflies. The strikes 109-111-113 were retained and the first stop is either 112-7 or 110-7. The price was pretty steep in comparison with 2007 & 2006 prices but again market is a bit more volatile right now and this month, the option is a bit longer than usual. We will see what will happen.