T-Bond trading comment (November 19, 2007)

The week ahead

Another short week ahead! In total we only have 3 trading days this week, but realistically the market stop Wednesday at noon.

Accordingly to this shortened week, the economic calendar will be light. The highlight will take place Tuesday afternoon with the release of the FOMC Minutes. In addition to that we have housing starts Tuesday morning and leading indicators Wednesday morning.

Tuesday will also so be expiration day for options on T-bonds, so our option strategy will come to an end. For a second consecutive month the strategy is not doing very well. The strategy is only points away of flat trading... but there is still two days ahead.

T-Bond trading comment (November 16, 2007)

New high again today but rather weak close for the week-end. Altough after yesterday's monster move, today's consolidation was to be expected...

Arrived this morning at the office after challenging lower and higher prices that would proove to be the resistance and support level for the rest of the day. As people arrived at their desk, the market was getting challenged as stock futures were climbing. This lasted until the stock market opened and started to loose ground. From there on, we developped a nice upward trend that nicely topped near the high we created early that morning. We spent the rest of the day oscillating around yesterday's close climbing to 115-17 for the close as equities were being hit. In the afterhour session, the T-bond lost again some ground as equities shot higher to close with a 0.5% profit for the day.

The market is still fearing for more bad news to come, as we saw some fresh steepners being put on 20 minutes before the pit session close. The T-note was gaining 4.5 ticks while the T-bond was only up 4 ticks. Normally the long bond should have been up by at least 6-7 ticks.

Yesterday, we said that we were entering into a new configuration that enable us to see much higher prices... We still stand by this scenario, but it is important to bear in mind that in Europe, the Bund is still not able to make new highs and is still stuck under the 115 line. At one point, the bulls will run out of time, so the sooneer, the better.

Our option strategy is expiring Tuesday afternoon. Right now the strategy is a little in the red... To flat trade we need the T-bond to close at 115-7 so let's hope for lower prices in the next two trading days. As for our daily momentum, that showed the green light at 3 o'clock yesterday we had a better day than what we were expecting with a close at 115-17.

T-Bond trading comment (November 15, 2007)

New high! We broke through 2 years old highs by closing at 115-12. This was realized on the back of weak equities and heightened risk of more problems in the financial industry. These are fancy reasons to say that the real answer is simply that the market is really bullish and the market is bid. This was plainly evident during the day when equities had not yet crapped out and were simply oscillating around the zero line while bonds were going higher and higher.

We arrived this morning at the office, with some passably bad news from the UK ( more banks, more in troubles). After testing yesterday afternoon's support at 114-08 early in the night, we started to climb back higher and even had a start to 115 line. This was a good point to sell the market, but only the first time... The second one was less fun... Especially since we went through it like a bullet... In any case, we are now developping a new scenario. By entering these waters, we are opening the door for much higher prices since we switch on the double bottom scenario (see The month ahead: September 2007) with a terminal target of around 123... For now the first target is 116-10 then 118-10. We could see these levels, if the credit related crisis goes on.

Our option strategy is now starting to bleed since it is naked at 115... Funny thing that 2007 would prove to be so trendy after the last three years much more choppy... In any case there is three days left so it can still go down! Also our daily momentum strategy clicked the green light at the close for higher prices tomorrow... Our conviction level is not huge on the trade after today's monster move, but we entered it at 114-11... No point in developping models if you are not going to follow them eh?

T-Bond trading comment (November 14, 2007)

The week Ahead

Short week ahead for fixed income players as the market was closed today.

We closed last week at the top of the market for 2007 and near 2006 tops... The question is will we break convincingly to the upside or remain in the large trading range between 105 and 115? Economic data roots for lower prices with relatively strong consumption and strong employment numbers but we are in the middle of a financial crisis and bad news just keep pouring in (today was the turn of e-trade).

This week's economic datas are Inflation numbers (Wednesday and Thursday), Retail Sales (Wednesday) and Empire State Mfg and Phily Fed surveys (Thursday)

T-Bond trading comment (November 9, 2007)

Okay, we have busted through the 114-00/05 and we are now closing in on the
115 level. Last time we visited these lofty levels was in December 06. In fact, the 115 vicinity has been the top side boundary for 2006 trading range. The 115 level has been a major resistance for the past two years.

Will it hold again this time ? Time will tell. One thing that's sure, is that it won't be the market elasticity that will bring back the T-bond lower as it did in December 06. Our elasticity model is calmly in the middle of its range giving no indication of an over-extension.

We arrived this morning with again the same pattern we have seen in the last few days. Run-up in the prices overnight, until 7h00 AM and then the start of a selling wave that usually bring us back in the mid 113-20s. But this time it was different. With half day trading and the perspective of a long week-end, market participants covered their shorts in the long end.
This up-move was not due solely to covering of directional position. Today, was also the first day that we did not see or hear massive steepners being put on, in fact curves even came back a bit and so gave some breathing room to bullish intentions on the long bond. In terms of trading, our amputed iron butterfly is getting closer to hot waters since he is naked at 115, but our momentum and intraday directional models had an honest day.

So what is up for the end of the month ? Can the T-Bond go much higher ? Well the easy answer is yes, especially given the actual context of financial crisis. But if we approach this question from a statistical point of view, we would tend to say no. Looking at the behaviour of the T-Bond during the month of November over the last 30 years or so (the graph only shows the last ten years), and we see that the long bond rallies no more than 2.25 dollars durring these 30 days 80% of the time. Now the question is, by how much did the T-bond rally during the first nine days ? The answer is a bit over two bucks, thus leaving only a slim potential for higher prices. Finally, as we mentionned in the first paragraph, the 115 level has also been as resistance area since the end of 2005.

T-Bond trading comment (November 8, 2007)

Days pass by and the market remains the same. Bearish intentions in the morning quashed by bad credit/losses/downgrade/liquidity/... news during the rest of the day. Today was no different than the rest of the trading week as we closed still hovering near the 114-00 yard line. The market seems to have bearish intentions but the actual financial crisis keeps prices-up as no one seems to be willing to sell the market.

The market opened on the strong side overnight challenging the 114s, as european equities were susbtancially lower. The Bund made a gap at the open but subsequently filled it, fuelling bearish convictions. This lasted until 9h40, just before Bernanke. In the mean time, scalping on each side of the market was profitable but not trend following. About then, the market started to climb as bad news started to hit the screens at the same time that Bernanke was reiterating the Fed's view for sluggish growth in the next 2-3 quarters and continued problems in the financial markets. Nothing new there but it had the expected impact. Stocks tumbling down, bonds higher and curves steeper! In late trading, we subsequently retraced or moves to the downside leaving the T-bond about unchanged.

What to expect for the next few days? The market looks like we are due for lower prices over the next two weeks but the short term will be controlled by the amount of bad news that continue to fill the screens... Also, from a graphical point of view, we aren't able to make new highs but our lows are higher and higher... Tomorrow is half day with no work on Monday. We have trade balance, import prices and U of Michigan.

One last thing, our daily momentum model is showing the green light to be long for tomorrow, but tomorrow is a half day... So could be weird... The lights turned green yesterday for eurodollars futures...

T-Bond trading comment (November 7, 2007)

Another day passes and we are still under the 114 level even after an unsuccesful try to the upside early this morning on more credit news... We are about flat over the day but this is only due to some steepning trades being put in place. If it was not of that, the T-bond would be much higher as are the 10 and 5 years notes. The T-Note closed on the top side of its daily range while the T-bond just bounced off its lows and slowly drifted higher but with a good lag.

For the last few days, we have been consistently bouncing off the 113-13/16 area. This would tend to indicate that this is becoming a new support level that would favor higher prices... Options are also showing more potential to the upside. This view can be easily explained by the fact that given the current context, people tend to prefer longs against shorts and will therefore be unwilling to sell in the wind even if long targets are reached. Talking about targets, the bund has bumped again, against the low 114s... It will be interesting to follow its pattern.

Stocks and news were definitely bearish with stocks getting hammered (Dow Jones down -2.64%). The only piece of news reaching ours ears were either about losses, writedowns or weak capital ratios... Not good. Also, we had several Fed speakers that were not exactly bullish...

Tomorrow, we have 30 years auction which could put a bit of pressure on the long bonds in the morning. Also on the economic front we have Claims and Bernanke testifying about the US economic outlook...

T-Bond trading comment (November 6, 2007)

For now the 114-00/05 resistance holds thanks to advancing stocks and tomorrow's 10 years auction. We arrived this morning with some choppy trading to the downside that offered plenty of opportunity for some scalping as we were bouncing from the bid to the offer all the time. The only time of the day where we had a bull run was just before Morgan Stanley announced new writedowns. This was the perfect moment to short more bonds, as recent history showed us that it was profitable to do that(eg: look at last week...). The rest of the day was on a downward slope as we went back to reach the 113-18 zone.

Does this means that the bull run is done and we are starting a new bear leg? Well no, not exactly, with the recent run to the upside, we could very well be in consolidation still... To confirm a bear leg we would need to break the 113. Just worth of mentionning, the Bund did not succeed to advance today despite rather supportive economic data. So...

Fresh beer is waiting for me.... So more tomorrow.

T-Bond trading comment (November 5, 2007)

I am back from holidays and the market is radically in another configuration than when I left! When I left for holidays, the market was firmly in a bearish move and we were trying to break the intermediate resistance standing near the 110 level. In the end, we did a nice little double bottom configuration and went back-up on the back of the return of the liquidity crisis.


Now the interesting question is where are we going ? The conscensus we are hearing on the street is that we should see higher prices before lower prices, but to confirm that we have to overstep in a convincingly way the114-00/05 level that has hold (minus a few overpass) since December 06. Granted, Friday we went to see much higher prices on the back of bad news in the banking industry ( Merrill's CEO out, Citigroup's CEO most probably out and a score of huge write downs by lots of banks in their fixed income books), but after testing higher prices this morning we went straight back toward the 114 level. This week will be interesting to look at, because there is no big economic news on the radar so the market will be able to develop its own story. If we do not overpass the 114 level significantly, we could see the 112 level as a first target and 110 after. It will be especially interesting to look at the T-bond's move since the Bund in Europe is closing on upside targets.


Did not look to much at the trading session today as I was touching back with the market.... Satisfied myself with some small scalping in the T-Notes and T-bonds.

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.