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General bond / interest rate discussion


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General bond / interest rate discussion

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  #1 (permalink)
 Schnook 
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Let this be a thread for general discussion of bond and interest rates trading.

Share your thoughts, ideas, observations, charts, etc. or ask questions. Whether outrights, curves, butterflies, intermarket spreads, basis trades, intraday or long term, it's all related anyway so fair game for discussion.

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  #2 (permalink)
 Schnook 
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Some initial thoughts...

Recent weeks have seen aggressive bear flattening as rate hike expectations have been pushed sharply forward. The Fed is expected to announce the taper next week (Wed Nov. 3) and other central banks, including the Bank of England, the Bank of Canada, and the Royal Bank of Australia have also assumed a more aggressive hawkish stance.
Front end rates in the UK, Canada, and Australia have all surged higher and the US almost seems to be lagging (the ECB, however, remains way behind the curve).

UK 2yr Gilts from around 0.10 in August to .65 now (as high as .75 last week) +55bps


Canada 2yr from .45 in Aug to 1.18 today! +73bps


Aus 2yr from .02 in Aug to .48 today! +46bps


US 2yr from .20 in Aug to .54 today +34bps



Today we have the 7-yr auction, and tomorrow we have a fair bit of data including core PCE, employment cost index, and UMich confidence & inflation expectations. Friday is also month-end.

US asset managers are very short duration, so well-positioned for this move. By all indications fast money is also short. The price trend on the daily and weekly timeframes is clearly lower.



Given current positioning, however, I feel that there could be a bit of a relief rally into month end and perhaps even through next week’s FOMC meeting. Kind of a sell-the-rumor, buy-the-news type of situation.

I intend to come out of today 7yr auction with a modest long in ZF which I expect to hold through Friday at least, but I have to admit, given the current backdrop and aggressive selling it’s a little scary to get long here.

Anyone else have any thoughts?

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 Schnook 
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As indicated earlier I'm now long some 5s at an average price of 121-22 5/8

I can't really point to any specific chart setup, or backtested strategy, as this trade is based primarily on positioning imbalances and near-term supply and demand events that, based on my own studies and observations, favor longs for at least the next 24 hours or so.

The market definitely traded heavy into the 7yr auction but October supply is now behind us and tomorrow is month-end, which could bring in some index-related buyers.

Intraday charts look like a bear flag coming out of the auction, which I do NOT like at all, but like I said this trade is not based on chart patterns.


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Symple
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@Schnook

You may are interested in the following read which I saw this morning:

- The Taper Tantrum Has Begun: Australia's 2Y Bond Just Blew Up After The Central Bank Unexpectedly Refused To Buy It
Source: https://www.zerohedge.com/markets/australias-2y-bond-just-blew-after-central-bank-unexpectedly-refused-buy-it

- RBA Calls Bond Market's 'Taper Tantrum' Bluff, Yields Explode Higher Again
Source: https://www.zerohedge.com/markets/rba-calls-bond-markets-taper-tantrum-bluff-yields-explode-higher-again



Symple

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 SMCJB 
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Maybe helpful to create a list of all the liquid tradable contracts. I'm familair with the US ones but not any of the Europe or Australian contracts.

US Fixed Income / Interest Rate Contracts

CBOT

FF | 30 day Fed Funds
ZT | 2 Year Treasury Notes
Z3N | 3 Year Treasury Notes
ZF | 5 Year Treasury Notes
ZN | 10 Year Treasury Notes (due to delivery requirements I gather this more represents 7yr than 10yr)
TN | Ultra 10 Year Treasury Notes (newer contract, more the 'true' 10 year than ZN)
ZB | 30 Year Treasury Bond (due to delivery requirements I gather this more represents 25yr than 30yr)
UB | Ultra 30 Year Treasury Bond (newer contract, more the 'true' 30 year than ZB)

CBOT Micro Contracts
2YY | Micro 2 Year Treasury YIELD
5YY | Micro 5 Year Treasury YIELD
10Y | Micro 10 Year Treasury YIELD
30Y | Micro 30 Year Treasury YIELD

CME
SR1 | 1 month SOFR**
SR3 | 3 month SOFR**
GE | Eurodollar (3 month LIBOR interbank)

Should be noted that Fed Funds, Eurodollars and SOFR contracts all price as 100 minus the interest rate. Hence an interest rate of 0.5% equals a price of 99.5.
The Micro contracts all price as Yield/Interest Rate. Hence an interest rate of 0.5% equals a price of 0.500.
All other contracts represent the price of the defined Note/Bond for the time period and do not specifically reference the rate/yield in anyway. (Other than the price is a function of it of course).


* SOFR is Secured Overnight Financing Rate and is the new benchmark that will eventually replace LIBOR.

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 TWDsje   is a Vendor
 
 
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I see many interpretations of the yield curve moves out in the public that I'm not entirely convinced of yet. There can be multiple reasons for such a change, including temporary liquidity needs. The 30 year is thrashing around a lot right now though. Should be a good week or two of volatility for interest rate trading, and then we might be in a better position to sort out what is really going on.

- SpeculatorSeth
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 Schnook 
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I think the moves in the front end are pretty unambiguous. All of the English-speaking central banks suddenly tilted hawkish, with the RBA clumsily dropping its rate peg, allowing things get very sloppy over there and the BOE *potentially* hiking as soon as this coming Thursday, just one day after the FOMC announces its taper. So there's definitely been a rather abrupt (and seemingly coordinated) shift underway in monetary policy which has led to a rapid repricing of the front end.

None of this helped my ZF long, by the way, but the month-end buyers came in as expected and took me out of my position for a profit of just over 2/32nds per contract. Gotta love those indexers


Next week begins a new month, with new supply coming and bond-bearish news expected from more than one central bank. As mentioned earlier, these big asset manager short positions suggests there's limited risk of further aggressive selling, but I also find it hard to believe they'll be forced to cover amid this backdrop, especially since most of them are pretty comfortably in the money at this point. But if nothing else, I'll probably be back again to play this game again on or about Nov. 30

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 Schnook 
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A bit of a relief rally today. Powell was slightly less hawkish than feared yesterday, and today the BOE chose NOT to raise rates, surprising some who had thought they would. Many of the 2yr sovereign yields I posted a few days ago have come back off their recent highs and with money managers very short their duration benchmarks there's now a decent short-covering bid coming into the market.

Crude oil back below 80 today also takes some pressure off the headline inflation fears,

I'm long a couple of bonds here but small size and frankly not the greatest entry. More of a scalp, really.

NFP tomorrow could be kind of interesting, as wage pressures are now becoming more of an issue. Large increases in average hourly earnings amid persistent labor shortages are anything but transitory and could bolster arguments for more aggressive normalization of interest rate policy. This, of course, would be bearish for bonds, and I will have exited my small long position well before then.

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 Redhouse 
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Interested in your thoughts on today. Big moves in the BUND last two days.


Sent from my iPad using futures.io mobile app

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 SMCJB 
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One of the STIRs I watch is the Z3 Eurodollar. After selling off hard at the beginning of the year, it bounced around between 98.75 and 99.2 all year (1.25% and 0.8% vs 0.19% current spot). Then in Sep and Oct it dropped from 99.05 (0.95%) to 98.45 (1.55%) where its been for the last month. Then in the last two days its broken out to the upside and rallied almost 0.2 (-0.2%) to 98.67 (1.33%) the highest level in almost a month.

Put another way, in the last 2 days, the market has removed one (of 6) of the 25bp Fed Fund increases that it had already priced in for the next 2 years.

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