Thursday, March 25, 2010

Is It Really That Easy?

Sometimes, it's possible to overthink this business.

Maybe it's the case that this angry missive from Congress to Geithner....


...encouraged China to stay away from this week's auctions, which led to this rather ugly auction.....


....which produced this rather ugly price action:

Maybe it really is that easy sometimes. Late last year, Macro Man decided to put a little capital on what seemed like an all-too-obvious trade: short govvys of profligate Anglo-Saxons versus long govvys of Calvinistic Teutons.

The chart below shows the yield premium of the "short basket" versus the long Bunds (note that the different maturities reflect the cheapest-to-deliver of the relevant futures market.)
As you can see, the basket's widened some 45 bps in 3 months. Not bad at all for a trade designed around the simple question of "which market is going to see the most new issuance hit the private sector relative to 2009"? Obviously, the trade was helped yesterday by the poor auction and by A Darling's "I am out of a job anyway so I really can't be arsed, to be honest" budget yesterday.

Sometimes, the best trades really are that simple....

11 comments:

TulsaGuy said...

“You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of f***ing bond traders?” - Bill Clinton 1993.

Nic said...

Nice! They say Bond traders are the smartest guys in the room ;)
Certainly worked better than GS call to clients to buy EURUSD, which failed in December and again this week.

Nic Barnes said...

i have always thought that it would be the (wise) bond investors that did for the equity market. as govvie yields move higher, it might negatively impact the equity market. debt forgiveness (imf into greece might mean haircuts, bank of america prin reduction) is not a good thing for debt investors. if it bad for debt investors, it is worse for the equity optimsts
www.nic-barnes.com

Leftback said...

Yes, I think your diagnosis of yesterday's action is probably spot on. The rubber band is starting to get very very stretched - either it breaks, which won't be pretty, or a sharp snap back is on the cards.

Nemo Incognito said...

LB's right. Covering the long bond short here. It ain't over until China quite publicly decides to dump treasuries. Pettis has done some reading on the history of that.

PS: For those of you looking for equity market bad news, check out Li and Fung's latest. They are one of the biggest sourcers of manufactured good for the likes of Wall Mart et al.

TulsaGuy said...

if several of the deficit runners are forced to rein in spending soon after another, that's gonna open a global demand gap, and risk-off is the way to go. but at least right now the market is saying risk-on. If it all does end in tears one day, are USTs still the safe haven like in 2008?

Leftback said...

If it ends in tears, dollars, yen, Treasuries, Bunds and the safest of corporates are the likely beneficiaries.

Surely we will not see a repeat of yesterday's carnage, MM? Perhaps the response will be that future Treasury announcements will limit issuance in the 3-7y range? Another long tail would be something of a disaster.

Macro Man said...

Not only is it long, it's prehensile!

econobserver said...

Well, inflation expectation is indeed low right now and I do not see changes in that front anytime soon. And you got to give Fed credit for their efforts to keep yield down. Ben tried to talk down yields today and if necessory, I guess that they can pull some bond-purchasing program again.

Leftback said...

Your pairs trade looking good, MM. We bow to your understanding of Calvinist self-restraint. Bailed too early on shorting the long end....

Last time we got close to 4.00% on the 10y, equities sold off. But this week it is still TGUF (Turds Going Up Forever).

Rossco said...

famous last words but it feels to me like the spoos locomotive finally caught up with the penny picker