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  • Post #1
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  • First Post: Edited May 6, 2006 5:47am Aug 24, 2005 4:17pm | Edited May 6, 2006 5:47am
Use this thread to discuss treasury bills, notes, bonds from central banks around the world.
  • Post #2
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  • Edited 5:27pm Aug 24, 2005 5:11pm | Edited 5:27pm
well im not sure what this means to the forex market, but here is my fundamental position on treasuries (im short USu05 30yr)....

its all about the housing bubble

the fed created the housing boom to save the economy. now that the economy is back on its feet, the fed needs to let the air out of housing so it doesnt burst. they made the housing bubble, now they need to fix it.

the way to cool housing is by getting long term rates to around 7%, which will put the brakes on the mortgage industry, which will inturn decreased housing demand, which will eventually bring housing prices back to a more reasonable level.

the fed is attempting to bring long term rates to 7% with fed funds hikes. but right now thats not working, the yeild curve is just getting flatter because the market only expects fedfunds to go to 4%(ie the “conundrum”). but the fed is going to keep raising fedfunds until long rates get to 7%, no matter how high they have to raise them. maybe the yeild curve will perk up at fedfunds 4.5%, maybe it will take 6%. either way the long term rates must go up which will drive bond futures to 110.

where it could go wrong:
if the housing market starts to cool without long term rates rising, the fed will likely stop the rate hikes, which would be bullish for bonds. watch housing inflation and sales numbers very closely, these will be the main indicators of a cooling market.

pimco talking up position

pimpco has been getting a lot of airtime lately, talking up their long position and saying the fed risks putting the economy in a recession. I think they are looking for liquidity to get out of their huge long position. pimco is big, but they cant beat the fed.
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Relax and be happy.
Hey Merlin, I'm impressed with your macro-economics! I think its always good to get a view from experienced traders who know the fundies as well as the technicals.

It looks like you know your bonds markets well which is good for me since I might have a few questions for you later!
haha well i am a much better quant, but i love the fundies
Relax and be happy.
if my analysis is correct (thats a BIG if), what does that mean to the dollar?

to me it says the dollar heads north because if long term rates get to 7%, everybody is going to want to own dollars.

what do you think?
Relax and be happy.
  • Post #6
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  • Edited Aug 25, 2005 2:45pm Aug 24, 2005 5:26pm | Edited Aug 25, 2005 2:45pm
I thought I'd begin with UK Short Sterling contracts which are roughly equivalent to the US 2 & 5 yr T-notes in that they react to changes in short term interest rates. This is the reflected by the rate decision announcements of the Bank of England and the Fed respectively.

First of all I've shown 4 contracts from Sep to Jun next year. To get the implied rate subtract the the bid offer spread from 100, so for example for Sep 05 we have 95.41/44 to get a rate spread of 4.56/59% (rate currently 4.5%)

Spreads are differences between consecutive implied rates. The spread between Sep and Dec is 0.11, and the next is 0.09 between Dec and Mar 06. I don't know the average spread but if it is comparative to the Feds (0.12 or higher indicates possible rate action) then it looks like the market might price in a further cut? (OK I'm not sure really!)

If you look at the chart then up until March this year the market was pricing in a rate hike to around 5.25% and then it dropped off rapidly to July - 100 basis points down to 4.25%, peaking on 7th when the BoE was set to make a rate decision. That was the same day as the London bombs and price spiked to complete the move. Since then it has fallen back to the current 4.575 mid price, so the rate cut this month could be a one off.

What has all this got to do with forex? If you believe that fundamentals move the markets, then which one would be top of the list? I think it has to be interest rates so following these markets can be interesting rather than reading a whole load of rubbish from the pundits. Why not look at the futures yourself and make up your own mind?

CBOT has some good articles that might be worth a read. In particular look for the "Anticipating Fed Action" from the list on this page:
http://www.cbot.com/cbot/pub/page/0,3181,1178,00.html
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Quoting merlin
if my analysis is correct (thats a BIG if), what does that mean to the dollar?

to me it says the dollar heads north because if long term rates get to 7%, everybody is going to want to own dollars.

what do you think?
yes i would agree!
Quoting Isotonic
peaking on 7th when the BoE was set to make a rate decision. That was the same day as the London bombs and price spiked to complete the move. Since then it has fallen back to the current 4.575 mid price, so the rate cut this month could be a one off.
i was thinking the bombings gave more motivation for further cuts, because the bombings hurt the economy and further rate cuts would make up for that.

btw, great analysis! what is the symbol for the uk bonds you are looking at? do you have a short position, or are you still thinking about it?
Relax and be happy.
  • Post #9
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  • Edited 2:38pm Aug 25, 2005 1:45pm | Edited 2:38pm
First we'll look at the US shorts (Eurodollar chart). You can see there has been sustained increases from last year that resulted in a peak of just over 4% in late March. For the next period until early June it looks like people thought that 3.5-4% might be the so called neutral zone which quickly changed afterwards and now they have reached their March high. (Remember implied rates are 100 - price so are inverted).

On to the Euro(ibor) - Euribored more like! Nobody seems to be expecting much - ranging 20 points until March and then rallied another 30 and now falling back. Currently rates being priced at just 0.1% than current rate - put this chart away!

Finally I've included the EURGBP spot chart and drawn a regression line between March and July. If you compare ShortStg with the Euribor & EurGbp you can see that Shortstg moved 100 points, Euribor moved 40 and the currency moved 400!!!

(One thing that puzzles me is that if the pound expectations fell by over twice as much as the euro, then why did it head south instead of north? )

If anybody is still awake at the end of this then do you know the answer!?
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Quoting Isotonic
One thing that puzzles me is that if the pound expectations fell by over twice as much as the euro, then why did it head south instead of north? )
great question! i wish i had the real answer, but id guess that it has to do with the high interest rate in the UK. i dont think that will be enough to sustain it though, rates are coming down, and so is the value of the pound. just look at the consumer indicators, the UK is very pessemistic these days and that will dry up consumer spending. im with you iso, long EURGBP!
Relax and be happy.
man, whats up with the bond market?!?!? it keeps on moving north. im itching to short more contracts, but im already stacked!

the market is obviously expecting a fed funds pause at around 4% or earlier. i just cant see it happening though!
Relax and be happy.
Quoting merlin
if my analysis is correct (thats a BIG if), what does that mean to the dollar?

to me it says the dollar heads north because if long term rates get to 7%, everybody is going to want to own dollars.

what do you think?
if interest rates go to 7%.mass housing repo?
I disagree with you Merlin a little bit. If feds need to cure the housing boom, they have 2 choices:

1- To bring up rates to the near 6-7% area so that people see housing investments as dull and go put their money in something else

2- To stop hiking rates at the 4-4.5% level and leave the housing boom healing to time

In scenario 1, they are slowing both the housing segment and all other segments of the economy as well, so the risk over the whole economy is high if this scenario is put to action. You can't fix a panic with another panic.

In scenario 2, they are risking a housing bubble burst, if any, and at the same time they are not hurting the economy that much.

That's why I prefer scenario 2 and I expect it to happen as well.

Another point in scenario 1 too is as soon as rates go to 5%, there is a severe risk of a housing bubble to burst with masses of people selling houses to invest the money elsewhere where banks and saving accounts the first and safest option.

On the other hand, if housing boom is left to time to cure, this would be very positive to the whole economy, as money will be injected back into other segments other than real estate slowly and without any booms, and at the same time, cost of capital will be still acceptable to most companies who want to finance operations.

Thanks,

Nader.
  • Post #14
  • Quote
  • Edited 6:17pm Sep 8, 2005 6:10pm | Edited 6:17pm
Quoting narafa
I disagree with you Merlin a little bit. If feds need to cure the housing boom, they have 2 choices:
ahhh, a challenge, just what i was waiting for

Quoting narafa
1- To bring up rates to the near 6-7% area so that people see housing investments as dull and go put their money in something else
when i was saying "7%" i was talking about long term yeilds, like on the 10year. you may already realize that, but i wanted to clarify in case not.

anyway...the reason 7% long rates will kill the housing market is NOT because "people put their money in something else" imo. the housing bubble was created by low cost of borrowing. now that everyone and their mother can get approved for a loan (because long rates are at 4% right now), that made the demand pool much bigger and therefore drove house prices higher.

SO, if long rates go to 7%, all of the sudden the demand dries up because people cant get loans easily. when demand dries up, there is a surplus supply, and therefore prices come down.

Quoting narafa
2- To stop hiking rates at the 4-4.5% level and leave the housing boom healing to time
i think that when fed funds gets to 4.5%, that will drive long rates to 6.5%, and therefore cool the housing market, but not at slow pace, i think it will pop.

Quoting narafa
In scenario 1, they are slowing both the housing segment and all other segments of the economy as well, so the risk over the whole economy is high if this scenario is put to action. You can't fix a panic with another panic.
this point is related to your outlook for the US economy. i am extremely bullish on the US right now so i dont think higher rates will create a panic. i actually think the equities market will continue north dispite the headwinds created by higher rates.

in a related point...you have to remember that the fed is very smart. they are raising rates because the economy is growing at a good pace. if they were bearish, they wouldnt be raising rates. that is, of course, my opiniion.

Quoting narafa
On the other hand, if housing boom is left to time to cure, this would be very positive to the whole economy, as money will be injected back into other segments other than real estate slowly and without any booms, and at the same time, cost of capital will be still acceptable to most companies who want to finance operations.
i cant see the housing market just "cooling", mainly because people have taken second mortgages on there gains, which is basically borrowing against an inflated home value. when the home value goes down, now the bank doesnt have the collatoral for the loan (cause the house is worth less), and therefore we get a very hairy situation that will cause a paniced housing market. it has to pop bubbles dont just let air out slowly...
Relax and be happy.
i think now it is under 117 it might drop quickly to 114.

merlin is the "action man" on bonds so i'm hoping he'll comment on his shorts!

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Quoting Isotonic
merlin is the "action man" on bonds so i'm hoping he'll comment on his shorts!
well i would come on here and brag about how right i am about bonds, but im still in the red on my positions

im short the SEPT 30yr at 114 14/32 (USU05).
im short the DEC 10yr at 110'31.5 (TYZ05).

so as you can see, i still have a few points to go before these turn positive. but as you have pointed out Iso, they look like they are on their way down lately.

ya know, something strange has been happening with my bond position. for a while there i was WAY down, yet i never felt any pain. im fairly immune to trading pain, but this time there is absolutely NO pain at all. im so confident in my bond position it could almost be dangerous.

dive baby, DIVE!!!
Relax and be happy.
Quoting merlin
im short the SEPT 30yr at 114 14/32 (USU05).
im short the DEC 10yr at 110'31.5 (TYZ05).
hmmm...interesting positions! i thought i'd check 'em out on the charts although i have guessed where your entry points might be (blue & red circles).

on the 30yr 114 seems to have fluctuated between s & r on the weekly. also from the monthly and weekly there seems to be a rising channel so any shorts could be a counter move! it could also drop big if it breaks below.

on the 10yr the level you picked seems to have similar s & r fluctuation and the daily and weekly are similar!
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LOL!

ya know whats funny about that? you are absolutely right about my entries, however, i entered pretty much randomly LOL!

iso, i know you are feeling me on this, you need to get short buddy, bonds are about to break down and i dont want to have to celebrate by myself!!!

you saw that move today, right?
Relax and be happy.
Quoting merlin
LOL!

ya know whats funny about that? you are absolutely right about my entries, however, i entered pretty much randomly LOL!

iso, i know you are feeling me on this, you need to get short buddy, bonds are about to break down and i dont want to have to celebrate by myself!!!

you saw that move today, right?
random entries!? surely not! don't you mean "well researched" instead!?

i haven't studied bonds that long so haven't really got a good feel for the s & r levels yet - that's where i was hoping you guys would come in! also my broker doesn't have a good data feed so i can draw on my usual fancy lines 'n' stuff!

on the 30yr i was looking for a pullback to around 117 (to breakout line) and it looks like that would of been a good spot (although i didn't say anything at the time).

do you think bonds will drop big? i think on the 30yr if it breaks 114 convincingly then yes but on the monthly and weekly it is channelling up..?

dunno...don't know enough about this market!

BTW i like the dialogue between you and Nader - good analysis and debate. Do you guys know much about the UK market as well.?

Best of luck!!!
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Quoting Isotonic
do you think bonds will drop big? i think on the 30yr if it breaks 114 convincingly then yes but on the monthly and weekly it is channelling up..?
dont wait for 114 man! it WILL go to 114, then down to 110. im only speaking from a fundamental standpoint, of course. i havent even done any technical analysis on the position, other than looking at the charts you have been attaching in this thread (thanks for those, btw).
Relax and be happy.
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