Understanding FI price change for this credit, either intra- or inter-UK seemed a whole lot easier in the good ‘ol days. But we make due.
For purposes of this humble little blog, we confine strategy to a spread or two. From mid-summer we advised that readers look to own (L-S) the UK term structure in the neighbourhood of 270, 2-30, 95, 5-10. Thus, serious investors should have been in July/16 or thereabouts. We next highlighted something on the order of 290, and 105, give or take, as a target. That worked by late Fall. Then re-entry was possible early Dec (270, 100). Last, 109, 288. Modest progress, but better than a stick in the eye.
Motivation for this exercise was (and still is) as follows: inflationary pressures would remain; the BofE would not rule out further firing; and finally, the flaw to most economists’ estimates for H2 2012 was an under-estimation of economic activity; these, caught up by the crowd.
Naturally we did not expect real strength, just something more than the analytical horde had in mind. This did not work perfectly. There were plenty of key releases which came in south of expectations; but, there were more which did not, including of course employment, Q3 GDP, and then the recent, better-than-expected Manuf PMI print (10% of the economy).
Then just when folks are ready to embrace a bit of resuscitation, two days later (Jan/4) we had the Services PMI print (75% of the UK economy) well below expectations, at 48.9, indicating a contraction. The services print has observers running to revise their forecasts. Now of course the view is for a contraction, Q4.
The UK real sector will continue in this vein – hit and miss. But key for any desk operation is to know that the course-of-least resistance for the term structure is wider, H1. Thus, one is to look for vulnerability in pricing, for the opportunity to strike. With the latest print we want to be out, but only to wait at the sideline to own the spread all over again, and for the simple reason that more weakness is priced in at our entry levels, than will materialize. The odds favour our approach.
Robert Craven
For purposes of this humble little blog, we confine strategy to a spread or two. From mid-summer we advised that readers look to own (L-S) the UK term structure in the neighbourhood of 270, 2-30, 95, 5-10. Thus, serious investors should have been in July/16 or thereabouts. We next highlighted something on the order of 290, and 105, give or take, as a target. That worked by late Fall. Then re-entry was possible early Dec (270, 100). Last, 109, 288. Modest progress, but better than a stick in the eye.
Motivation for this exercise was (and still is) as follows: inflationary pressures would remain; the BofE would not rule out further firing; and finally, the flaw to most economists’ estimates for H2 2012 was an under-estimation of economic activity; these, caught up by the crowd.
Naturally we did not expect real strength, just something more than the analytical horde had in mind. This did not work perfectly. There were plenty of key releases which came in south of expectations; but, there were more which did not, including of course employment, Q3 GDP, and then the recent, better-than-expected Manuf PMI print (10% of the economy).
Then just when folks are ready to embrace a bit of resuscitation, two days later (Jan/4) we had the Services PMI print (75% of the UK economy) well below expectations, at 48.9, indicating a contraction. The services print has observers running to revise their forecasts. Now of course the view is for a contraction, Q4.
The UK real sector will continue in this vein – hit and miss. But key for any desk operation is to know that the course-of-least resistance for the term structure is wider, H1. Thus, one is to look for vulnerability in pricing, for the opportunity to strike. With the latest print we want to be out, but only to wait at the sideline to own the spread all over again, and for the simple reason that more weakness is priced in at our entry levels, than will materialize. The odds favour our approach.
Robert Craven
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