Good evening,
This is the last post I will write on this blog as I have accepted a new position at the same bank but on another desk (Even another country in fact!). Interest rates will not be my focus anymore, hence the end of this blog.
To all the persons who wrote to me to share their views on the T-bond or support me, thank you!
That's the end for now!
Cheers
I did not follow the market very closely today as I was stuck on an unexpected holiday due to a snow storm... But here are my thoughts about today as I was driving back towards home once the highways were cleaned.
Today, we saw the relief rally we talked about last Friday as the market was getting over-extended to the short side on strong inflation data and a depricing of the credit/liquidity crisis. Today, we saw both technical players, playing for a quick buck on a small rally, as well as more fundamental players getting hedgy about the liquidity in the market... Apparently, lots of people think that the FED's cash injection might not be enough... Also we had a flurry of new downgrades in the financial sector...
The question is, is there a lot more room to the upside on the T-Bond? Yes there could be, but right now lower prices could be seen in the very short term as the equities are due for a bit of a relief... They have been hit constantly in the last few days.
All that said, I remain very sceptical of where the price will go in the next few days... Our long position we had put on at Friday's settle was take-profited early this morning and for now we are flat... I will return back to scalping the market intra-day until more visibility comes up.
Not a good day... Did not respect the trading plan and got caught trading the wrong positions at the wrong time with the wrong size and blew the whole week's PnL in half an hour. Up to there, had a pretty good streak posting good stable PnL all week long but got ahead of myself this morning thinking I new better than the market... In the end, the market was right and I was wrong... Before I blew up more money, I pulled out the plug, suck on my losses and thought of why I did not respect the clear and simple rules I have established... The answer is I was too confident. There is a saying going around stating: "Don't worry the market will make you humble whether you want it or not". True.
Outside of that, CPI numbers got out on the strong side this morning and led to a sell-off (again) in the bond market... From there on we just oscillated in a 10 point range all day long with liquidity dying out as we where closing the week... The last two days have been a bit of a change as for once the bonds did not follow the opposite of stocks... Both ended down these last two days.
Looking at a weekly chart we see the drop has been very steep over two weeks in the T-bond... Sure we have a depricing of the credit/liquidity crisis and some strong inflation numbers but I think the market has maybe fallen a bit too hard lately and should maybe bounce a bit... From what I hear, I am not alone with that opinion... In any case our daily elasticity model gave us the go ahead to buy some long bonds at 3PM. Our target is 50 cents. Hope to see it sooner than later!
Okay, that was an erratic session... It almost felt like the market was a trapped mouse trying to escape but not kwnowing where to go...
Arrived this morning on downward pressure after yesterday's little panic. This subsisted until the FED came in announcing a concerted plan with other central banks to inject liquidity in the market, thus alleviating the pressure for financial institutions to fund themselves... This had an immediate impact as stock indexes soared on the news and bonds got killed... Basically the market started to deprice the credit crisis and dreamt off higher growth for next year... This did not last for very long and we found some support in the mid 114s again (We had already tested these levels on Friday). From there on we skyrocketed back towards pre-announcement levels as the market grew again aware that we were not yet out of the bush... The day was volatile but gave very nice trading opportunities as the trading was not choppy.
We got killed on our daily momentum trade which recommended to buy at 116-15, but at least we made some decent money today nibbling the market at juncture points... Did not cover for all of the the loss but at least part of it... Also still sad to have let go my Jan08 call spread on Friday...
We've been saying for two days that the drop has been too abrupt and that we need to maybe take a breather.... We are almost up two bucks on the day! We did not expect that much
The market opened the day up and kept climbing the whole day in front of the Fed. This move was nice and well expected after rebounding against the 114-10 area yesterday (level on which we took off for our preceding run-up). This part was fun and easy to nibble as the market moved in nice little waves.
Then the Fed came... The Fed did less than what the market expected and the market did not like that... Results everything that was not risky just jumped up as well as credit risk instruments. The FED cut by 25bps the fed fund and the discount... Statement dropped the negative bias on growth but said there was a lot of uncertainty both on inflation and growth... Blabla... Right now, we see high inflation in Europe, China is even worse and GDP is running at 4.9% on a annual basis... Ok, given that with the subprime we could see a slowdown.
Today's move in the market was rather surprising... Such a move to the upside means that the recent downmove (almost 5 bucks peak to through) was just smoke and we are in for good on the long side... Unless of course the market is just stupid and today was again another panic... By the way, don't expect Libor to tighten much, because the Fed's move clearly indicated they are not too concerned about liquidity problems... If they had been, they would have lowered the discount by 50bps, not 25. Granted, they could still flood the market with cash.
Also our daily momentum turned bullish at the settle... So we put on some longs but betting the farm on that would maybe be a bit too bold... Wouldn't be surprised to see the market relax tomorrow.
The other day, the market was too pessimistic about the future of the economy... Now it seems, that we are too optimistic... For a fourth consecutive day, the T-Bond went tumbling down as market participants re-adjusted their view. Every day, we now hear some positive news (MBIA receives cash injection from Warburg Pincus, Soc Gen takes 4.3Bn SIVs on its books without affecting its capital ratios) and the only bad ones we hear are transformed into good ones ( We are thinking UBS). In addition to that, we had all that talking about long term inflation over the week-end and how this should send fixed income instruments lower...
In any case the market looks bearish in terms of price, but the recent drop seems rather too abrupt... The fall as been so fast that our daily elasticity model went from overbought a week and a half ago to almost oversold. In fact, we had bids at 114-02 to buy the market for a jump the other way. We did not go that low but the market maybe needs a little breather before resuming its downmove.
Tomorrow is FED day as we talked earlier. Market is pricing 25 bps rate cut but people are also looking to see if the Fed will cut its discount rate by 50bps... This would be a way to help the liquidity crisis without lowering the overnight rate by too much....
Well in the end the reverse hammer we saw last Friday ona weekly chart proved to be right for this week as we have sank by two bucks since then and almost three since the top seen on Tuesday. Is there more room to the downside? There is always room for lower prices when you are in the 115s but maybe the recent drop has been rather too abrupt... In fact it has been so abrupt that our elasticity models that were in the higher bands are now nearing the oversold thresholds on the long bonds... In addition to the abruptness of the drop, we also have to take into account the 115 line on which we bumped today... This line has been a major haggling area for the last few years as shown on the above graph (the big fat purple line).
Today was a nice downward, no surprise day. We opened and started to go lower and basically just kept going down all day long. This downmove was spurred by several factors. First, we had the Paulson's subprime rescue plan and secondly we had the quite strong NFP. Granted the trend is downward on the NFP, but there is hope. Such a number must have calmed a lot of people on the street as it gives us reassurance that the consumers will continue to consume as they have a job and thus money flowing into their bank accounts... So for now, everything is good...
Next week, everybody will be looking at the Fed on Tuesday... According to the Euro-dollars, the market is widely expecting a 25 bps rate cut... This is less agressive than earlier this week when the market was giving a 50-50 probability for 25 or 50 bps rate cut... There is still a fair amount of people in the market that thinks that the Fed should maybe do more than less and cut by 50 bps given the actual poor financial conditions, but this is not what the market says (Options, Euro-dollars and Binary options all point to a 25 bps for now).
The last two days have been firmly bearish with only slight pick-ups when bad news where hitting the screens... Today was the turn of MBIA... Moody's announced that they were not so sure about MBIA not experiencing a capital shortfall in case of worsening credit conditions. That lilttle upward move was crushed and from the top, we lost a whole dollar in three and half-hours. This move on the T-bond was a bit strange by the way, because it was not mirrored by the 2, 5 and 10 years notes....This means it was probably not some steepners being put on because if so one the other maturity would have gone up... The other solutions are either a large long position was being dumped by someone who took its profit on the recent run-up or someone paying fixed in the long end, thus forcing the receiving bank to sell the 30s to hedge the direction. In any case, this move pushed the T-bond back to its long term fair value against the T-note according to our elasticity model. This move also pushed the T-bond towards its recent support levels sitting in the high 116s.
Today, we saw the ADP number get out on the very strong side at almost +190k.... This is extremly bullish, but we have to be cautious with the number as we have seen in the past ADP sometimes gets it wrong... One more day to wait until the real number... If the NFP comes out that strong, we might see a real bloodbath in the market since in addition to strong employment data we also have the government working hard to find a solution to the subprime crisis...
Did you know?
If you take a weekly chart, you will notice that we have been climbing for 8 straight weeks... When was the last time this happenned ? The answer is in 1998... So what we are seeing in the market is pretty rare and just add to the temptation of selling the market if not already done....
Well, the reverse hammer does not look to good right now.... Since the close of Friday, we have climbed by almost a buck on heightened risk in the credit markets... The market remains very fragile and will shoot up as soon as an opportunity presents itself... On the other side of the trade, we are hearing more and more people saying that its valuation is maybe getting on the rich side. With the bull run in the commodities and the inflation creeping up in Europe (look at Euro-zone CPI...) it might be logical to see lower prices in the long bond.
Today was a real rollercoaster. Go up, go down, go back-up, fall again and close unchanged with yesterday.... And this was in the face of falling equities. Don't know if this is the start of the reverse trend but we have lots of room to the downside!!! Looking at our non-stationary model, we see that the last time we visited such distortion levels the T-bond had skyrocketed to 123 from the 110 area. After that, the market tanked by almost 20 bucks... We won't do the same thing this time, but maybe a little downtrend wouldn't hurt anybody.... All that said, with the current market we can still go higher...
Interesting week we have ahead of us! From a techinical standpoint, we have just formed a nice reverse hammer on the weekly chart and last time such a configuration like that presented itself, the market strongly reversed its course... So let's wait and see. Still in that same vein, our non-stationarity model tells us the market maybe needs to catch its breath a bit...
Now from an economical point of view, we have plenty to look at this week. For one, we have the ISM reports at the beginning of the week but we also have the Non-Farm payrolls on Friday! This will be very interesting especially given the actual context of a slowdown in the US. In addition to that, we will also follow the Government's efforts to stem the housing crisis. Lastly, this week the BoC, the ECB and the BoE will release their rate decision... This will be most interesting to follow as the Fed will go live the week after.
Fundamental view:
The credit/liquidity crisis is still there and housing is still making new lows. What more is there to say? The market is predicting more and more a hard year for 2008 with the possibility of a recession in Q4 2008. For now, the market is waiting for the FED to cut rates one more time at the December 11th meeting. Otherwise, there isn't much to say except that it will be very interesting to see December data come out. Jobs and inflation will be of particular interest as these two points have shown a certain strength that has been missing in the rest of the economy. The market seems also more rational following the little panic we had on November 26th. The panic seems to have cooled everyone and we are now all a bit more rational. So next time we climb up, we might do it in a more orderly fashion. This move reminded me of what happened in mid/end June 07 when we saw some extreme bearishness conclude the downward run we had started a couple of months before.
For now, we might end our bullish trend with the rumours circulating in the markets. Noises say that the government is toying with the idea of a freeze on mortgage rates, which would most likely stem the housing foreclosures we've had in the last few months.
Seasonal/statistical point of view:
Last year the beginning of December had signalled the end of the summer/autumn rally as the market reversed sharply and quickly went on to loose a bit over three bucks.... But looking at history, December has never been a month prone to see lower prices... The main theory is that as year end approaches, people dump there risky holdings and buy safe haven assets like govies. Altough this year, I would bet that a majority of persons have already dumped their risky assets. Anyhow, looking at a seasonal chart, the trend is clearly for higher prices. Over the last 7 years, only twice did we see prices drop... Over 20 years, prices fell only 7 times during the month of December.
Looking at our elasticity index, we can see that there is nothing to do on a weekly basis but at least we saw some action during the month of October on the daily elasticity model. Right now, both models suggest "nada"...
Technical point of view:
After blasting trough all the resistances during the month of November, we will most probably test those new supports as the market might give back part of what it has taken in the last few weeks. Why this bearishness ? The answer can be found in the post of November 30th, where we talk about a weekly reverse hammer... The supports for December are the 117-10 zone (on it right now), the 116-10 area, the 115 level, 114 level and finally the 112 zone. The last few supports might be hard to reach but the first three are do-able. If ever the market goes the other way, there is not much to look at. After the 119-15 area there is nothing before the tops we visited in mid 03 at 124-12.
The week is almost over and the close is not the most bullish as seen in the above graph. We have formed a nice hammer and according to chartists this is a bearish signal rooting for a change of direction. This would nicely cap-off the current run and would enable us to see lower prices...
Today was quite interesting. After initially trading higher, which enabled us to unload our long at 118-04 (we were lucky), the market went crashing down as equities posted another strong performance all across the board on probabilities that the Fed will cut rates and other central banks will follow suit. In a little less than an hour, the market lost a complete dollar before regaining a bit. Sadly, we missed that opportunity. At least our options are the right way... Afterwards, the market whipsawed between116-29 and the 117-10 zone enabling us to nibble on each side of the market. Liquidty was rather scarce today as it was year end for several US-dealers.
Next week, is a new month and the last of the year. The week will climax with the job reports on Friday... The market is expecting a softer number after two strong numbers.
After a little calm, the T-Bond has restarted its forward march, RSI is back at more reasonable levels andelasticity is ok, thus leaving room for higher prices. But if we look at a weekly chart, the picture might not be that bullish... Depending on tomorrow's close, we might be forming a reverse hammer. If the market closes in the low 117s, we would have a nice candle picture which could signal a reversal of the latest trend... Just to remind ourselves, this is what signaled the present bullish run we started at the end of June 07.
All that said, today was an interesting day with clear trends almost all day long. The 117-20 level offered some good support while the 118-06 zone provided us with a resistance. All in all, the market climbed by almost a full dollar today. This move was not a complete surprise with the continued widening of the LIBOR levels, the weak equities overnight in Europe and the month end buying indexers that have to re-adjust their portfolio duration to the upside. Another signal was also, yesterday's monter move in the equities that was not followed by the bond market. They only went causiously down, letting us know that if the equities showed any weakness', they would shoot up and that is what happenned today...
Our daily momentum turned long at the settle. Now we need a 118-05 print to be happy... We might see it on any weakness tomorrow as more people jump in the month-end band-wagon. Tomorrow we have PCE data as well as CPM.
Reversal day! After yesterday's run-up, today we saw some nice distribution. At one point the market was loosing alsmot 2 bucks... Talk about crazy days.... The short we put in place yesterday at the settlement was taken off during the night as the T-bond went crashing down, before picking-up ground for our open. From there on, the market essentially monitored what happened in the credit and equity market for the rest of the day...
If you think that the market is too high and don't want to risk too much money, an interesting play is to buy put spreads... This morning at one point, the 117-116 put spread for march was trading around 22/64... This is almost some 3 to 1 profit ratio...
That is it for tonight. Short message, no time for more
I have nothing to say except that we are in panick mode. The market in my opnion is a bit ahead of himself... But hey who am I to decide when the T-bond is high enough...
The whole day was bid, bid, bid... Our daily elasticity gave us the go ahead to short the market at the settlement... Now we need to see a 118-9 print to be happy. Our short call are getting whamed... Granted we still have protection room but the MTM is not friendly right now ( vega and prices higher)
I don't want to appear too bearish on the future direction of the T-bond, but today's run-up was mainly done while the stocks where only midly down (got killed after the settle although) and swap spreads were also loosing ground... Weird...
The market is going to focus on three items this week. First, Thanksgiving shopping data supposed to come out on Monday. Experts are expecting relatively strong numbers. Secondly, GDP data on Thursday. Is the economy still growing at a good pace? The advance number for Q3 showed a strong number on Oct. 31st. Finally, as the market has done in the last couple of months, it is going to focus on more credit related stories .
In addition to that, several numbers are due on the housing sector for the last three days of the week, but it is very doubtfull they will shed more light into the problem...
Looking at the above chart, we can see that on a historical basis the market seems to be overextended, but the last time we moved by that much in such a period were crisis times... The last three years where we had these kind of moves were 2000, 1997 and 1990 (the last two are not shown on the above graph). Each time we were in the middle of a crisis: Tech bubble imploding, Russian/Asia/LTCM and recession in the US...
Bulls are on steroids with what continues to happen in the credit market. In fact the market seems to be panicking a bit (as seen in Europe where the players in the Covered Bond market decided to completly stop market making activities so as to stop the blood shed since bids are non-existent). Another days brings another trolley of bad news and the market just keeps going up in sympathy with the problems despite the fact that it should maybe relax a bit.
