Let’s refresh. We know we have a central bank that is inclined to ease in the face of price pressures. Sure, the Bank held fire today but accommodation remains the course of least resistance. This is the recipe for an expanded term structure.
We are not launching a satellite here folks. Every major security firm has tons of models and a chorus of analysts. Discard the whole bunch and think like a farmer, or mechanic; that is, discard complexity - the refuge of scoundrels (and overpaid street types).
Naturally we can witness today’s price reaction to a steady Bk of England – prices weakened and the curve expanded. This seems contrary to our advice. But things are not as they appear. The mkt crowd’s initial reaction is almost always reversed. And this is exactly why so many missed this year’s major expansion, and why we and our clients did not.
The first reaction is to sell the longer end, given the Bank will not visit this maturity. This is fine for day traders but no one else.
Assume the Bank announced a huge expansion and targeted 20 – 30yr. What would any sober trader do? Hesitate, and then SELL that maturity, and with abandon. Why? Because things are not as they appear. Such a major bloat would fire price pressures, overwhelming any pure supply considerations.
OK, let’s see now. Last recommendation was to buy (L-S) the curve, Jan/10 (5-10, 109 / 2-30, 288). We recommended half the gains be taken Feb/13 (121/310). Last, 113, 310.
Now what? Simple. To repeat from Feb/20 – look for the chance to own the curve, and since we have come in a tad, mid-section, look to do so now.
Robert Craven
We are not launching a satellite here folks. Every major security firm has tons of models and a chorus of analysts. Discard the whole bunch and think like a farmer, or mechanic; that is, discard complexity - the refuge of scoundrels (and overpaid street types).
Naturally we can witness today’s price reaction to a steady Bk of England – prices weakened and the curve expanded. This seems contrary to our advice. But things are not as they appear. The mkt crowd’s initial reaction is almost always reversed. And this is exactly why so many missed this year’s major expansion, and why we and our clients did not.
The first reaction is to sell the longer end, given the Bank will not visit this maturity. This is fine for day traders but no one else.
Assume the Bank announced a huge expansion and targeted 20 – 30yr. What would any sober trader do? Hesitate, and then SELL that maturity, and with abandon. Why? Because things are not as they appear. Such a major bloat would fire price pressures, overwhelming any pure supply considerations.
OK, let’s see now. Last recommendation was to buy (L-S) the curve, Jan/10 (5-10, 109 / 2-30, 288). We recommended half the gains be taken Feb/13 (121/310). Last, 113, 310.
Now what? Simple. To repeat from Feb/20 – look for the chance to own the curve, and since we have come in a tad, mid-section, look to do so now.
Robert Craven
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