Posts: 780 since Apr 2016
Thanks Given: 22
Thanks Received: 1,018
|
I've had a little bit more success with ZN this last month or so, but overall this year it has been extremely difficult to trade. I think other comments are in the right ballpark how flows can make things difficult, but to explain why it is so challenging right now I think we need to go a bit deeper.
There are many factors that affect treasury flows. The main ones that I am aware of and look at are as follows:
- Future expectations of Federal Reserve policy.
- Hedging funds against interest rate changes.
- Hedging for participating in large corporate bond offerings.
- Hedging for bond auctions.
- Overall bond supply and demand.
- Changes in currency flows.
- Spread trading.
- Calendar spreads and seasonal flows.
- And of course let's not forget the actual cash treasury market that ZN is derived from.
Treasuries can be difficult to trade because it is hard to be a sufficiently informed trader. Not only is there a lot to know, but the fundamental information is just not as widely available to retail traders. However, not all of these factors matter all of the time. Future expectations of Federal Reserve policy in particular significantly overshadows all other factors.
Which brings us to the problem. The Federal Reserve is expected to keep rates at essentially zero for quite some time. So the most essential flow, and the one easiest for retail traders to follow is essentially dead. That's kind of the whole point. The Fed wants investors out of bonds and into more risky assets to jump start the economy, and it is quite effective.
So you are left with flows that at least with the information I have are impossible to predict. I find the currency flows to be particularly troublesome. You'll see a spot that seems to be providing significant resistance. Then some bank will move money across seas and it will tick through that area on practically no volume.
Now you can compensate for these factors. That means you'll need to be keeping an eye out for currency moves and understand how it could affect your instrument. The same goes for spreads. Yes they will impact the volume you see, but you should be watching the whole curve, and how the spread will affect the leg you are trading. Still it's going to be hard, and I ofen find myself clueless about why treasuries are moving where they are.
So you just have to limit your trading to when the factors you do understand are more influential than the factors you don't understand. Basically you just have to be much more selective about your trades, and not rely purely on some technical read. Otherwise there's just too much risk of trading against an informed trader. Those times where the equity markets are simply too volatile to trade will always come, and when that happens the extremely high liquidity of the ZN is a huge advantage. Today was a great example where equities started falling apart, and eventually the treasuries squeezed out an excellent stop run higher. Expectations of more supply coming in to pay for fiscal stimulus is creating good opportunities, but it is still spotty.
|
