To Kill a Mocking Treasury note

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It has been tough trading & positioning in interest rates in 2014. Anybody telling you otherwise is either lying or very lucky. From the chart above, you can see that U.S. 10-year Treasury note yields have moved from 3.10% to 2.55% in January; and ever since whipped around every 1 – 2 weeks between 2.55% & 2.80% very erratically … Mocking at all bulls & bears in Treasuries.

Now every lay person will say that it then presents a simple ”range trading” strategy of 2.55 – 2.80% for the supposed smart trader to monetise.  Well in real life, it might not be so simple as the prices gap back & forth and the supposed extremities occur during U.S. economic data releases in very short time frames in a blink of an eye more often than not.  As such, you will be lucky to capture at most 50% of these moves. And if you are unlucky, you get stopped out at some of these ”instant algo flash up or crash down” while still building your positions.  And we are talking about ”basis points” here … where making 10 b.p. or 0.10% is like a home run these days! Something that any lay person on the street will not really care about or bother.

During such times, perhaps it is the ”no stops”, ”no leverage” & ”no haste” real money investing approach that works best in the bond markets now.  Essentially replicating a ”long gamma” approach of ”buying low” and ”selling high” … in putting on positions at the 2.55 – 2.80% range with preparations for overshoots at times but not stopping out.

Asianmacro is short June14 10-years Treasury futures late last week (i.e. paid rates & betting on higher yields in the interim).

It’s a few hours before U.S. employment report … Of Trees payoff & cheap optionality

There’s a sense of palpitation in the air ahead of every U.S. employment report on the 1st Friday of the calendar month that will then set the tone of all markets across all asset classes.  The question is do you try to do something ahead of the economic figure release in an attempt to ”guess” what it will be vis-a-vis the market consensus whereby all current markets before the figure release should be trading at what will be the appropriate ”fair value” ex-ante to the consensus expectations?

Illustration 1: Ex-Ante Path Tree Portfolio Impact Assessment Model

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Asianmacro over the years have designed some path dependency tree diagram model with some amount of assumptions in assigning my ex-ante probabilities of each outcome going out to at least 4 to 8 nodes ex-post figures.  This does not tell me what to do but rather the consequences if I leave my portfolio as it is and the resultant impact after the figures ex-post … so that I can decide what I need or should do if I am worried about the expected portfolio value ex-ante or a particular node outcome especially if it involved a substantial drawdown even though the probability might be low ex-ante, before the figure release. An example of a screenshot output of my model is found above in Illustration 1.  It is actually quite interesting to note that this exercise is seldom done even in most financial institutions or funds where a over reliance on VaR models is really less than ideal since it is backwards looking using historical volatility & correlation data like looking at the rear view mirror of a car when driving!

Illustration 2: Payoff Diagram for TYQ3 Puts 125 / 124.5 / 124 / 123.5 Condor

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Anyway, it is definitely a toss-up of the coin on such events like U.S. employment data although I must say that Q.E. tapering or exit is definitely on the cards and it is only a question of when. But it will be low risk-reward ratio to attempt to be long or short any instrument ahead in size and that is when Asianmacro likes to exploit some cheap option strategies if they exist due to heightened volatilities or skews.

My favorite at the moment is buying some cheap put condors on UST 10-year note futures with expiry in two Friday on 26 July 2013.  Recent history has shown that 10-year yields move between 20-30bp in the next 2 weeks post U.S. employment reports with 50% of the move occurring in the 2 trading days following the release.  Current UST 10-year yields is at 2.50% and I am looking at it to head to 2.2/2.3% or 2.7/2.8% by 26 July 2013 and not be here by that point in time.

Asianmacro managed to buy the downside put condor with payoff shown in Illustration 2 for less than 1bp with 10x payoff.  This is the kind of odds I normally like with definable downside risk of 1bp and making 10x max-payoff should UST 10-year yields rise to 2.7/2.8% for 26 July 2013 expiry.

 

 

 

*Asianmacro is a beach bum managing his own wealth. Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself. While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith. Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.

Did BOJ just saved the world ? …. For now …

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Illustration 1: Key Central Banks’ Balance Sheet as % of GDP … BOJ is the Champion and still going strong!

It was looking bleak in Asian markets in the morning with heightened geo-political tension overnight on the news of the U.S. missile defense system deployment to Guan that knocked S&P500 futures off its pedestal and KOSPI down 2% and looking to fall more precipitously.  China and Hong Kong markets were also closed for 清明节 (Qing Ming festival), the annual ”tomb sweeping” custom of praying to one’s deceased ancestors that can potentially usher in the ”Ting Hai (丁蟹) effect” too from 4 April 2012 onwards. http://tradehaven.me/2013/04/01/be-warned-the-ting-hai-%E4%B8%81%E8%9F%B9-effect-may-kick-in/.

But all that was to change with the ever ready-to-please his political masters, BOJ (Bank of Japan) Governor Kuroda when he delivered the QE (Quantitative Easing) manna from heaven at the conclusion of his two day BOJ policy meeting. http://uk.reuters.com/article/2013/04/04/uk-markets-forex-idUKBRE92L08Y20130404 

From above Illustration 1, BOJ is on a viagra inducing roll by increasing its balance sheet even further in both absolute and relative terms to Japan’s GDP.  We can see that the U.S. Federal Reserve has sort of reached a plateau in its QE ballooning of its balance sheet as % of U.S. GDP.  In fact, ECB (European Central Bank) and BOE (Bank of England) have both reduced their respective aggressiveness in QE where their % of GDP has turned and are actually heading lower since Q4 2012.

With the ECB policy meeting announcement due in a couple of hours, it will be interesting what ECB Chief, Trichet will deliver.  While Asianmacro do not expect a rate cut (Good Lord if he does and we will be in high heavens in bunds and DAX if he does that!), Trichet is likely to sound reassuring dovish in the statements and in putting some expectations of that out.  The key is to weaken the EUR (*return of beggar-thy-neighbour FX depreciation policy) as it will indirectly be a ‘devaluation’ option for the Club Med countries that are facing the economic stresses at the moment without the need for them to leave the EUR in going back to their Lira, Peseta, Franc etc.

While it does not change the bigger picture that I have presented in my previous post over the last 2 weeks, in the next hours – days, just be prepared for a short term liquidity boost expectations rally in stocks and for USD to continue to strengthen. Long USD & wear diamonds ! http://tradehaven.me/2013/03/14/beware-the-ides-of-march/

 

 

*Asianmacro is a beach bum managing his own wealth.  Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself.  While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or  implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith.  Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication.  This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.