Friday, February 15, 2008

Bonds Get Kervieled

What a weird day. Everyone's favourite helicopter pilot regales the market with stories of his whirlybird exploits, including an implicit promise to fly again soon....and the long end of the US curve gets whacked. The chart below doesn't really do the move justice, but that was a big sell-off at the long end yesterday; a glance at Macro Man's sadly in-the-red P/L reveals that 10 year swap yields have risen more than 30 bps so far in February, with nearly half of that move occuring yesterday.
What made the move so perverse was that Bernanke's commentary was pretty dovish. Sure, he paid lip service to keeping an eye on inflation, but no one really believes that any more, now do they? In any event, it's hard to conclude that the long end was building in any sort of inflationary risk premium, given that TIPS sadly sold off even more than nominals, taking the breakeven several bps lower yesterday. Oh, and all of this happened while stocks sold off as well. What gives?
Macro Man heard some mumbling about switches in the deliverable bonds for futures, and it is true that futures held in rather better than cash. But ultimately what this looks like was that there was a motivated seller with large size to put through the market at the long end. Some are suggesting that this is mortgage convexity selling. While it seems off for that to be kicking in at such low yield levels, stranger things have happened. In any case, what we know is that bonds have gotten whacked by a large unidirectional seller; in other words, they've gotten Kervieled!

While Macro Man is of course watching this market very closely, he also has one eye on the Alpine snow reports. He'll be on the slopes next week for a spot of sunshine and exercise....and perhaps the odd glass of vin chaud. While he plans to keep an eye on markets, and perhaps contribute the odd poem or two to this space, he'll obviously be occupied with things other than actively trading in and out of positions.

He therefore leaves the following risk management orders:

*Buy $25 millon USD/JPY at 110.25 on a stop loss basis

*If the OEX/Russell 2000 ratio closes below 0.8650, exit the position on the opening the following day.

Given the noise and skittishness of all asset markets, there's relatively little that would surprise Macro Man about the next week's worth of trading. In times like this, being away from the market for a few days can often yield a new and profitable perspective. Will it happen this time? Let's see....


Peter said...

have fun next week !

while you slide off the slopes, the equity markets, USDJPY, USDGBP and yields will be sliding off as well ..
except TRY which will hopefully be taking the ski-lift upwards

take care

Anonymous said...

i do

MS said...

Since I enjoy reading your market observations I will provide you with a higher level of understanding of what your next week in the slopes will be like.

Unlike the markets this forecast is more likely to be accurate in the short term:



tmcgee said...

one word: convexity. enjoy the slopes!

David Pearson said...


Could just be bonds fell because they stopped rising.

Sound glib but its not. The market expected a direct correlation between rate cuts and bond yields. The trade is a no-brainer for deflationistas, and apparently the bond market is rife with them.

Only, post-1/22, rate cut expectations fell and bond yields rose. The deflationistas became anxious, and then ran for the hills.

What they missed, perhaps, is that inflation is accelerating everywhere but here (in the U.S.).

David Pearson said...

Sorry, the above should have read "the expected level of rates fell and bond yields rose."

Anonymous said...

i stil think trouble is brewing in libor land ...siv's are again struggling to fund and there has been some forced cdo liquidations this week as mentioned previously my fav trade aside from the schatz/tnote steepener from 2 weeks ago is to be short any front stir (ed, stg, euribor) v long 2nd contract or receive the matched maturity ois...get ready for the feb/may/aug/nov credit panic to hit this month...

CV said...

Have a good one MM ...

I was in Austria last week and those slopes, whereever they are, sure make for some good fun.