GLOBAL INVESTMENT STRATEGY, EXECUTION AND RISK MANAGEMENT FOR INSTITUTIONAL INVESTORS

                             

BONDS and EURO UPDATE : YIELDS TO CONTINUE LOWER as we APPROACH one of the BIGGEST confirmation quarter ends.

We are gradually forming some of the MOST bearish yield charts in MANY years!

Chart 3 US 30yr yield, DOES HISTORY REPEAT ITSELF, IF so yields are one way for a long while. A key signal will be to breach last quarters low 2.9737.

European bonds have been all failing 50 day moving averages, thus confirming the bigger yield lower CALL. Ideally we continue to grind lower in yield and end the month at the lows, that would then CONFRIM lower yields for some time.

EURO : We have a new low so the clock is ticking for lower prices.

**LIQUIDITY : NOT TO BE OVERLOOKED**

Liquidity certainly does now seem to be an issue as Italy remains void of any decent cash flow and the futures ranges are extensive on light volume.

I don’t normally venture outside the technical space BUT to me a major concern is LIQUIDITY and lack of it, certainly if another Italian situation arises. Most orders now are generated or routed via a system, markets are made-quoted by a system. None of these have been really tested in a 2007 type situation, DESPITE many RSI’s predicating a REPEAT. Last week proved liquidity in Italy to be appalling due to circuit breakers and management reluctant to quote on MTS-Tradeweb.

IT can be argued, “there is still futures” BUT some contracts are NOW made up of 75-90% ALGOS, this is not a good statistic, especially when they were ABSENT post the big USD SWISS move. Also margin increases are possible. This lends itself toward MORE OPTION plays, achieving longevity on IDEAS and not get stopped on an illiquid blow out.

ASTOR RIDGE : Independent Ideas, Research, Liquidity, Anonymity and Trusted Experience.

 

• UK:         14-16 Dowgate Hill, London EC4R 2SU
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• •             Astor Ridge does not provide independent research. We have no dedicated or paid strategists, research portals, or research subscriptions. However, you may receive unsolicited marketing communications from our Introducing Brokers from time to time, which may refer to specific trade recommendations. These recommendations are based solely on the opinion of the author, and are not official research recommendations of Astor Ridge.We have considered guidance from ESMA, and any written material from our Introducing Brokers that might fall within the scope of the rules will be provided for free, and made publicly available on our website, to any EU Investment firm that registers for it.
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• •             This marketing was prepared by Christopher Williams, a consultant with Astor Ridge.  It is not appropriate to characterize this e-mail as independent investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a trade recommendation. A history of marketing materials and research reports can be provided upon request in compliance with the European Commission’s Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains opinions or recommendations, those opinions or recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the those who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of, and income from, any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 
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• •             You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 
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Hi there, a quick look at the week ahead and some trade(s)

 

Pls me if you’d like to see more of my thoughts

Office:   +44 (0) 203 - 143 - 4178

Or email me
James.Rice@AstorRidge.com

 

Supply – just Italy coming next week in continental Europe plus a tap of the UK 20y 2037s

                               

Supply for Week Ahead	Following Week
Tuesday,  Jun 26	Tuesday,  Jul 03
{IT} CTZ & Btp€i	{AU} Austria TBA
{US} US 2y, $34bln	{GB} UK 10y Gilt, Oct 28 tap
{GB} 2037s £2.25Bln
	Thursday,  Jul 05
Wednesday,  Jun 27	{SP} TBA €4-5bln est.
{US} US 2y FR Notes	{FR} France Longs €7-8bln est. TBA
{US} US 5y Note
Thursday,  Jun 28
{IT} BTP Auction TBA 5y & 10y
{US} US 7y, $30bln

 

Italy

 

 

Italy has been a bumpy road this month. We look to be in a new paradigm of higher volatility
The key is to think about the boundary conditions but also scale accordingly for a high Var environment

 

Graph 1.1 - Italy vs Germany Yld spread and 30 rolling-day volatility (generics, source data BBG)

 

 

 

There is some logic to the flattening of the 10s30s curve in Italy

The back end of the Italian Curve has flattened out to reflect that the risk of default/Redenomination is packed into the front end of the curve

The 20yr remains anomalously rich

 

Graph 2.1 – Italian, Spanish & French Yield Curves on Spread vs Germany

*yields are adjusted for some coupon discounting effects by subtracting the swap spread and adding the Z-Spread

 

Trade – Fade the Italy cheapening by exploiting the exaggerated bid for Italy High coupon 20y

Pay this spread…

100 * ((YIELD[BTPS 4 2/37 Corp] - YIELD[BTPS 4.75 9/28 Corp]) - 0.65 * (YIELD[DBR 3.25 7/42 Corp] - YIELD[DBR 0.25 2/27 Corp]))

 

Mechanics:

Sell: Btps 4% 2/37  - €10k, 6.75MM Notional

Buy: IKU8 Future - €10k, 96 contracts
Hedge: Sell 45 RXU8 contracts / Buy 18 UBU8 contracts

Carry & Roll (per 3mo):
Italy: +5.4bp
Germany (ratioed portion): -2.0bp

Net C&R: +3.4bp/3mo

 

Risks: as per the History the Italian curve could push further into extreme flattening/inversion

 

This them is borne out as anomalous by looking at the Italian Prob of Survival Curve

By looking at spreads over various tenors AND H/L coupon relationships we can calculate the implied  cumulative probability of default over time

 

 

 

More on France & Belgium

to follow…

 

 

 

 

 

 

 

James Rice

 

image001.jpg@01D21F13.B69A4950">

UK: 14-16 Dowgate Hill, London ec4r 2su

US: 245 Park Ave 39^th Fl, New York NY 10167

 

Office:   +44 (0) 203 - 143 - 4178

Mobile:  +44 (0) 754 - 011 - 7705

Email:     James.Rice@AstorRidge.com

Web:       www.AstorRidge.com

 

This marketing was prepared by James Rice, a consultant with Astor Ridge.  It is not appropriate to characterize this e-mail as independent investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a trade recommendation. A history of marketing materials and research reports can be provided upon request in compliance with the European Commission’s Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains opinions or recommendations, those opinions or recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the those who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of, and income from, any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

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From: GEORGE WHITEHEAD (ASTOR RIDGE LLP) At: 06/22/18 07:14:44

Subject: UK's Hammonds Mansion House Speech-HigherTaxes Not More Issuance!!

Following on from yesterday with the MPC vote shift & an August hike back on the table-Long Gilts look cheap & the curve should reinvert !!!

Key points & main story attached :The chancellor also:

Announced plans for a Financial Services Skills Taskforce

Said he won’t break his fiscal rules to fund a 20.5 billion pound ($27 billion) boost for the National Health Service

Reaffirmed his goal to reduce the national debt!! *These comments should boost demand for longs & the 49/68 flattening trade !*

This marketing was prepared by George Whitehead, a consultant with Astor Ridge. It is not appropriate to characterize this e-mail as independent investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a trade recommendation. A history of marketing materials and research reports can be provided upon request in compliance with the European Commission’s Market Abuse Regulation. Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail. The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains opinions or recommendations, those opinions or recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the those who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of, and income from, any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results.

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP.

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA): Registration Number 579287
Astor Ridge LLP is Registered in England and Wales with Companies House: Registration Number OC372185
Astor Ridge NA LLP is a member of FINRA/SIPC: CRD Number 282626
Astor Ridge NA LLP is a member of the National Futures Association (NFA): Firm ID Number 0499303
Astor Ridge NA LLP is Registered in England and Wales with Companies House: Registration Number OC401796

**The perfect storm is COMING, the storm clouds are gathering! So many charts replicate 2007 scenarios.**

There are too many poignant charts to display in the mail, therefore the ATTACHMENT needs to be opened.

 

I have elected to send this prior to the quarter-end as I think DISCUSSIONS need to be had. It is also the right time to think about trades to DO, be it as a PLAY or PROTECTION.

The views expressed in this piece are ALL based upon HISTORICAL reaction to the LOCATION we are at NOW. The charts used are also of long-term duration thus these signals won’t be eroded for some time, hence the WORRY.

The MAIN contributors are US yield charts, LOWER yield forecasts with the back drop of the HIGHEST yield RSI expectations. The EURO and EUROPE is a massive concern and I still have equities as a WORRY. I think CERTAIN EM benefits.

The dark clouds are forming and may soon become ONE. Liquidity will form another leg to this drama given the high level of mechanisation, with this comes circuit breakers, limits and eventually the OFF button.

Today the EURO quietly printed a new low BUT for the TECHNICAL outlook it’s a KILLER BLOW.

The EURO is the first chart and I think EUROPE itself is in TROUBLE, political uncertainty and I believe the DAIMLER story is only the tip of the ICEBERG. We will soon witness unrest and political turmoil. Enough of fundamentals!

I HOPE THIS PROMOTES SOME DISCUSSION and am happy to discuss trade ideas. We will forward our own ideas over the lead up to the month end. This is a MASSIVE QUARTER end. I think SOME EM benefits.

I guarantee these views won’t sit right with many BUT worth noting historically. All views should be endorsed at quarter end.

 

ASTOR RIDGE : Independent Ideas, Research, Liquidity, Anonymity and Trusted Experience.

 

• UK:         14-16 Dowgate Hill, London EC4R 2SU
• US:          245 Park Ave, 39^th Floor, NY, NY, 10167
• Office:   +44 (0) 203 143 4174
• Mobile:  +44 (0) 7980708683
• Email:     chris.williams@astorridge.com
• Web:       www.AstorRidge.com
•  
• •             I provide our research notification below for your convenience:
• •            
• •             Research Unbundling:
• •            
• •             Astor Ridge does not provide independent research. We have no dedicated or paid strategists, research portals, or research subscriptions. However, you may receive unsolicited marketing communications from our Introducing Brokers from time to time, which may refer to specific trade recommendations. These recommendations are based solely on the opinion of the author, and are not official research recommendations of Astor Ridge.We have considered guidance from ESMA, and any written material from our Introducing Brokers that might fall within the scope of the rules will be provided for free, and made publicly available on our website, to any EU Investment firm that registers for it.
• •            
• •             If you are a MiFID firm and do not agree with our approach, and instead believe that you must pay for written commentary or trade recommendations, then Astor Ridge will accept  payments determined by    you.
• •            
• •            
• •            
• •             I also direct you to our disclaimer on our email footer:
• •             This marketing was prepared by Christopher Williams, a consultant with Astor Ridge.  It is not appropriate to characterize this e-mail as independent investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a trade recommendation. A history of marketing materials and research reports can be provided upon request in compliance with the European Commission’s Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains opinions or recommendations, those opinions or recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the those who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of, and income from, any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 
• •            
• •             You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 
• •            
• •             Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287
• •             Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185
• •             Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626
• •             Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303
• •             Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796
• •            
• •            
• •             If there is anything else you require from us to continue receiving our market communications, or prefer a different medium for access (e.g. publicly available password protected access on the Astor Ridge website), please do let me know.
• •            
• •             Otherwise, if you are more comfortable to deem consent by simply acknowledging receipt of this email, and continuing our trading relationship under our updated terms of business below, without registering your disapproval, we are happy to proceed on that basis.
• •            
• •             Many thanks,
• •            
• •             Chris

 

 

 

 

 

 

The UK…

• BoE is expected to remain on hold again today with the market pricing in a ~47% chance of a 25bps hike in August and a full 25bps+ in Feb ’19. The market is keen to see how much conviction Carney and co have that the Q1 slowdown was indeed weather related and that Q2/Q3 will see the UK back on track. While the MPC statement at the meeting should help, we may need to wait until tonight’s Mansion House speech for the full story. To be frank, Carney’s become rather difficult to read so we don’t know whether we’ll get a hawk (“Q1 a temporary blip”) or a dove (“trade wars and Brexit worries holding us back”).  We saw a modest 3bps cheapening of 1y1y sonia yesterday, likely a reflection of Theresa May’s victory in Parliament although another new high in the USD this am has cable making another new 6 month low at £1.31…

 

• Theresa May and her team are likely breathing a sigh of relief this morning after the histrionics of the last couple weeks. It’s clear, however, yesterday’s victory has come at the cost of the credibility of MPs like Grieve who flip-flopped at the last minute. May’s promise of more money for the NHS will come at the expense of the UK tax payer as Hammond is expected to announce today – clearly bowing to pressure from the Remainers/Labour party. With  the fires in Westminster extinguished for the time being David Davis and company are still long overdue for a breakthrough on the Brexit plan as Barnier and his team grow more and more impatient. This stagnation will be reflected in GBP and to a lesser extent how sonia trades.

 

• Yesterday’s U of Cambridge deal was a bit more risk than initially expected, driving a dis-inversion of 20/30 vs 50s and a modest cheapening of UKT 1F 71s of 2.8bps since Tuesday. Given the correlation of these long-end spreads/flies to the absolute level of ultras yields, we think that flatteners like UKT 46s-55s or UKT 49s-65s are looking cheap here having retraced more than half of the rebound we saw last week (chart below). Supply in the long-end is light next quarter with just a tap of the UKT 57s on Jul 19^th (£1.5-2.0bln) and a new 2049 30yr benchmark on Sep 11^th. The coupon flows in July will be heavily tilted towards the 15yr+ index as £2.125bln of the £3.047bln will be paid in longs which at the margin is flattener supportive.

 

• Tuesday’s £2.25bn tap of the UKT 1T 37s is now front and center with just 3 sessions to go. There has been little meaningful movement in gilts so far this week, even with the modest retracement in long-end spreads as the U of Cambridge deal kept the mkt side-lined. As above, there’s still a fair amount of event risk in the UK this week that could drive further cheapening of the 37s on the curve, especially if G U8 rallies and the UKT 27-37 spread continues to steepen, having made another new s/term wide at 47.1bps this am. The chart below shows how well correlated UKT 27-37s has been with Sonia (1y1y, inverted)), suggesting the spread is a good proxy for a bearish MPC trade with the added bonus of coupon and index drivers that are 15yrs+ positive all else equal.  The UKT 1T 37s are at the peak of the OAS curve where rolldown begins to gather speed and are unlikely to be tapped again this calendar year. We like buying 37s here on the 36-37-38 fly or vs 27s and 47s on a 25/100/75 beta weighting with a view to adding if they cheapen a bit more.

 

• Following the Parliamentary vote and Scotia/Experian deals, the UKT 7/23s recovered on the curve, the UKT 7/22-7/23-9/24 fly back to 6.6bps from 7.4bps on Tuesday. We still expect the UKT 7/23s to trade well into next month given the index dynamics and arrival of the new 5yr on July 24^th. Along those same lines, our UKT 20-23s flattener is working nicely, now 31.5bps mid, almost 5bps flatter than Jun 6^th levels. We see this persisting for now and still target the ~30bps level.

 

Charts…

• UKT 46-55s retracing the recent curve flattening, back to re-load levels in our view.

 

• UKT 27-37 Sprd vs 1y1y Sonia (inverted)

 

• UKT 36-37-38 fly a low octane version of UKT 27-37s

 

• UKT 20-23s still flattening nicely… Holding on for 30bps area

 

More to come…

 

Mark

 

 

 

 

image009.jpg@01D28D1B.42BD95C0">

 

Mark Funsch

 

O:            +44 (0) 203 - 143 - 4177

M:            +44 (0) 789 - 996 - 4051

E:             Mark.Funsch@AstorRidge.com

W:            www.AstorRidge.com

UK:          14-16 Dowgate Hill, London UK EC4R 2SU

US:          245 Park Ave, 39^th Floor, NY, NY, 10167

 

This research was prepared by Mark Funsch.  He is a consultant with Astor Ridge.  A history of his marketing commentaries can be provided upon request in compliance with the European Commission’s Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains recommendations, those recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA):  Firm ID Number 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796

 

• FX UPDATE :
• Whilst CORE FX holding, EM crosses and BONDS might present SOME opportunities, namely BRAZIL AND SOUTH AFRICA.

• USD strength from here is ONLY JUST THE START.
• USD EM has seen many BLOW OUT scenarios but a TOP might be in for USD BRL.

    USD CAD continues a SLOW but effective GRIND.

ASTOR RIDGE : Independent Ideas, Research, Liquidity, Anonymity and Trusted Experience.

• UK:         14-16 Dowgate Hill, London EC4R 2SU
• US:          245 Park Ave, 39^th Floor, NY, NY, 10167
• Office:   +44 (0) 203 143 4174
• Mobile:  +44 (0) 7980708683
• Email:     chris.williams@astorridge.com
• Web:       www.AstorRidge.com
•  
• •             I provide our research notification below for your convenience:
• •            
• •             Research Unbundling:
• •            
• •             Astor Ridge does not provide independent research. We have no dedicated or paid strategists, research portals, or research subscriptions. However, you may receive unsolicited marketing communications from our Introducing Brokers from time to time, which may refer to specific trade recommendations. These recommendations are based solely on the opinion of the author, and are not official research recommendations of Astor Ridge.We have considered guidance from ESMA, and any written material from our Introducing Brokers that might fall within the scope of the rules will be provided for free, and made publicly available on our website, to any EU Investment firm that registers for it.
• •            
• •             If you are a MiFID firm and do not agree with our approach, and instead believe that you must pay for written commentary or trade recommendations, then Astor Ridge will accept  payments determined by    you.
• •            
• •            
• •            
• •             I also direct you to our disclaimer on our email footer:
• •             This marketing was prepared by Christopher Williams, a consultant with Astor Ridge.  It is not appropriate to characterize this e-mail as independent investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a trade recommendation. A history of marketing materials and research reports can be provided upon request in compliance with the European Commission’s Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains opinions or recommendations, those opinions or recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the those who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of, and income from, any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 
• •            
• •             You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 
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Bottom line: As I outlined on Friday, the EUR curve is being driven from the short end, however the implied volatility surface does not reflect these realized moves. As a consequence, bull-steepeners/bear-flatteners can be set as zero-cost structures. Since Friday, the curve in all sectors has bull-steepened aggressively, so zero-cost bear-flatteners are very attractive as a way to fade the rally, but with limited downside (compared to outright rate positions).

 

Trade 1:
Buy EUR 201mm 1m5y payer atmf (k=0.279%)
Sell EUR 58mm 1m20y payer atmf (k=1.446%)
For a premium take-out of 0.5bp (indicative mid)

Trade 2:

Buy EUR 201mm 1m5y payer atmf (k=0.279%)
Sell EUR 48.9mm 1m20y payer atmf (k=1.446%)
For zero cost (indicative mid)

Net delta at inception: 7k/bp short (for 100k/bp of underlying 5y)

Forward curve ref: 116.7bp
Spot curve: 117.9

Rationale: We are seeing a strong directionality in all sectors of the EUR curve: currently a sharp bull-steepening. Previously large market moves have caused the opposite mode (bull-flattening, bear-steepening) as the ECB has been solidly on hold for some time, and the implied volatility on short-dated tails has been suppressed as a result. Now that at least some movement is priced for the ECB, short rates are also able to join in, and reflect market sentiment on the rate outlook.

 

The chart is the EUR 5y-20y spot spread. This sector has steepened around 8bp since last week, with the 5y rate moving further than 20y (though to be clear, both have rallied).

 

The trade is to fade this steepening with a conditional flattener on a short expiry. This is a tactical play for a simple reversal of the price action, without the exposure to a continued bull-steepening move.

Why 1m expiry? Steepeners are negative carry trades currently, so a short expiry limits the carry/rolldown overhead. Also this is a trade for a quick reversal, so we want to capture as much of the intrinsic value of any move in the near term (and not have to wait longer to see the move in the underlying fully reflected in the value of the options).

 

Why 5y-20y? Spot 2y rates are still anchored (as even the most hawkish commentators see little action before autumn 2019), so the 5y rate has more scope to react to changing rate expectations. The largest curve move (and hence the largest potential P&L on a reversal)

The table shows the current implied volatility on 1m options, together with the move in the spread vs the 5y rate. What we are looking for is the largest potential P&L from a flattening reversal together with the largest differential in implied vols.

1m2y	14.2	Curve steepening in latest rally
1m5y	28.7	Vs 5y rate
1m10y	34.8	3bp
1m15y	34.4	5bp
1m20y	34	8bp
1m30y	32.4	10bp

 

The largest curve move has been in 5y-30y, however the vol differential is not the best, and the 30y has seen less of a rally than shorter tenors. The second point is important as the only way to lose money on this trade is for the long rate to sell off more than the short rate. The risk of this is highest for the 30y, as it is not unheard of to have idiosyncratic swap flows at the long of the EUR curve. For that reason more than others, I prefer to use 20y as it a compromise between potential P&L, implied vol differential and the correlation with the 5y rate.

I’ve put two alternatives above: the first where the net premium is taken out of the trade; the second where the premium differential is used to buy more than the DV01-neutral amount of the 1m5y payer, allowing the curve to possibly make some money in a parallel curve shift to higher rates.

 

Risks: As mentioned, the risk is a sudden move to a bear-steepening mode, without a transition through bear-flattening. This could occur if rates stabilize at these levels and we see significant paying flows in 30y. In my view the first market move will either be a bearish rate reversal or a continuation of the rally, but the risk is there.

 

As always, I’d love to hear your thoughts on this!

Best wishes,

 

David

 

 

David Sansom

 

 

image001.jpg@01D21F13.B69A4950">

 

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This marketing was prepared by David Sansom, a consultant with Astor Ridge.  It is not appropriate to characterize this e-mail as independent investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a trade recommendation. A history of marketing materials and research reports can be provided upon request in compliance with the European Commission’s Market Abuse Regulation.  Astor Ridge takes no proprietary trading risk, has no market making facilities, and has no position in any security we discuss in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change, and Astor Ridge has no obligation to update its opinions or the information in this publication. If this e-mail contains opinions or recommendations, those opinions or recommendations reflect solely and exclusively those of the author, and such opinions were prepared independently of any other interests, including those of Astor Ridge and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the those who receive it. The securities discussed herein may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate each issuer, security or instrument discussed herein, and consult any independent advisors they believe necessary. The value of, and income from, any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by Astor Ridge LLP is owned by Astor Ridge LLP. 

 

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BUND VOL IS IT NOW VALUE?

Although the RSI isn’t the LOWEST we are at the previous low 3.94%.

Here are some possible OPTIONS VOL plays using a 161.45 reference.

Ideas :

 Aug RX STRADDLE  164/169

Sep  RX STRADDLE  220/225

Aug  RX  161/162 strangle 120/124

Sep   RX 161/162 strangle 175/179

Aug   RX 162/163 1x2 cs ref 45 is 1.5/3 (for the 1 leg)

ASTOR RIDGE : Independent Ideas, Research, Liquidity, Anonymity and Trusted Experience.

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Trade:

 

Buy UKT 0.75 7/23 vs UKT 4.25 12/27 on YY ASW @ 8 bps:

 

 

Stop: 5bps

Target:  14 bps

 

Blue – UKT 7/23-12/27 MMS

Purple – UKT 7/23-12/27 Yld Spread

 

 

Rationale:

On 22 July, the UKT 1.25 7/18s will mature (34.8bn total, of which 30.6bn privately held). While the APF will reinvest its 2.9bn across the curve, the private sector will reinvest its 30.6bn predominantly in the 0-5yr sector. This should substantially benefit the 0T 7/23 5yr issue, which is cheap on the curve and and is nearing its final expected tap on 6 June, when it will reach its full benchmark size, to make room for a new 2024 5yr maturity (the outgoing benchmark typically richens as Asset Managers avoid the new issue until it gets tapped up to benchmark size).

 

Moreover, Central Bank reserve managers (holding predominantly <5yrs) will need to buy Gilts into month end rebalancing to account for the recent drop in Sterling.

 

As a result UKT 5yr ASWs are expected to outperform vs longer issues. The 4q27 (CTD to Gilt futures) is an ideal hedge as it is a rich and fairly liquid bond which will fall out of the CTD basket on 28 Feb (causing it to lose its deliverable premium). The 4q27s has been rich because it is a low float bond which tends to richen into delivery due to squeeze risk. This risk disappears after March 2019 delivery.

 

Z Spread (OAS) Curve – The last high coupon CTD, 5 3/25, trades cheap on Z spread (OAS) to surrounding low coupon bonds; conversely, the current CTD 4.25 12/27 trades rich to surrounding low coupon bonds. On a simple interpolated maturity basis, the 4.25 12/27 are nearly 6 bps richer on Z spread than the 5 3/25.

 

 

History:

 

For extended history, we look at the UKT 2q23-4q27  Z spread into the 1% 9/17 and 4% 9/16 redemptions:

 

 

While the UKT 2q23 ASW richened into the 9/16 redemption, it moved sideways into the 9/17 redemption while the 4q27 ASW cheapened.

Given we are in the middle of the range in UKT 5yr ASWs, the ASW box is the preferred expression for the upcoming redemption.

 

Timing:

 

Typically the front end richening starts 3 months before the redemption event, and peaks by the ex-dividend date of the maturing bond (10 business days before delivery).

So it makes sense to enter the UKT 0.75 7/23-4.25 12/27 MMS now, and look to exit the trade by 9 July ex-dividend date for UKT 1.25 7/18.

 

UKT Curve overview and bond selection:

(0.75 7/23 and 4.25 12/27 OAS = Z spread is highlighted in blue):

 

0.75 7/23 is locally cheap

4/25 12/27 is locally rich

 

 

Jim Lockard

Founder / Managing Partner

image001.jpg@01D21F14.8E7A1C60">

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This commentary was prepared by Jim Lockard, a Managing Partner at Astor Ridge. It is not appropriate to characterize this e-mail as independent investment research as referred to in MiFID and it should be treated as a marketing communication even if it contains a research recommendation. A history of his commentary can be provided upon request in compliance with the European Commission’s Market Abuse Regulation. Astor Ridge does not engage in market making or proprietary trading, and has no position in any security discussed in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change.. Any recommendations contained herein reflect solely those of the author and were prepared independently of Astor Ridge or its affiliates. This publication does not constitute personal investment advice and may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate recommendations discussed herein. Actual investment returns may fluctuate as a result of changes in economic and market conditions (including market liquidity). Past performance is not necessarily indicative of future results.

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by us is owned by us. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

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Trade:  Buy the belly of UKT 4q27s-4t30s-4q32s @ +13.25 bps:

 

 

Add:  14.25bps

Stop:  16.0bps

1^st Target:  10.0bp

2^nd Target:  5.0bps

 

 

Rationale:

 

1. The 4q27 will lose their CTD status on 28 Feb, when June 2019 becomes lead contract
2. The 4q32s have enjoyed neutral duration status for the Gilt All Stocks Index; this status will shift to 4h34s by Q3 (as 32s roll down and index extends with 71s syndication)
3. The 4t30 will eventually be CTD vs March 2020 contract (i.e. by Dec 2019; at current yield spreads, the 1.625 10/28 will be CTD into Jun/Sep/Dec 2019)

 

Z Spread (OAS) Curve – The last high coupon CTD, 5 3/25, trades cheap on Z spread (OAS) to surrounding low coupon bonds; conversely, the current CTD 4.25 12/27 trades rich to surrounding low coupon bonds. On a simple interpolated maturity basis, the 4.25 12/27 are nearly 6 bps richer on Z spread than the 5 3/25.

 

 

History of high coupon CTDs:

 

1. The UKT 5 3/25, a multiple cycle CTD, cheapened 20 bps on 2.75 9/24 - 5 3/25 - 2 9/25 bfly after they lost CTD status in June 2016:

 

 

2. The UKT 8 6/21, another multiple cycle CTD, cheapened 40bps on 3.75 9/20 – 8 6/21 – 3.75 9/21 bfly nine months before losing CTD status in June 2012:

 

 

 

Jim Lockard

Founder / Managing Partner

image001.jpg@01D21F14.8E7A1C60">

UK: 14-16 Dowgate Hill, London ec4r 2su

US: 245 Park Ave 39^th Fl, New York NY 10167

Office: +44 (0) 203 -143 - 4172

Mobile: +44 (0) 7795-027-865

Email:  jim.lockard@astorridge.com

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This commentary was prepared by Jim Lockard, a Managing Partner at Astor Ridge. It is not appropriate to characterize this e-mail as independent investment research as referred to in MiFID and it should be treated as a marketing communication even if it contains a research recommendation. A history of his commentary can be provided upon request in compliance with the European Commission’s Market Abuse Regulation. Astor Ridge does not engage in market making or proprietary trading, and has no position in any security discussed in this e-mail.  The views in this e-mail are those of the author(s) and are subject to change.. Any recommendations contained herein reflect solely those of the author and were prepared independently of Astor Ridge or its affiliates. This publication does not constitute personal investment advice and may not be suitable for all investors. Astor Ridge recommends that investors independently evaluate recommendations discussed herein. Actual investment returns may fluctuate as a result of changes in economic and market conditions (including market liquidity). Past performance is not necessarily indicative of future results.

You should not use or disclose to any other person the contents of this e-mail or its attachments (if any), nor take copies. This e-mail is not a representation or warranty and is not intended nor should it be taken to create any legal relations, contractual or otherwise. This e-mail and any files transmitted with it are confidential, may be legally privileged, and are for the sole use of the intended recipient. Copyright in this e-mail and any accompanying document created by us is owned by us. 

 

Astor Ridge LLP is regulated by the Financial Conduct Authority (FCA):  Registration Number 579287

Astor Ridge LLP is Registered in England and Wales with Companies House:  Registration Number OC372185

Astor Ridge NA LLP is a member of FINRA/SIPC:  CRD Number 282626

Astor Ridge NA LLP is a member of the National Futures Association (NFA): Firm ID 0499303

Astor Ridge NA LLP is Registered in England and Wales with Companies House:  Registration Number OC401796