GLOBAL INVESTMENT STRATEGY, EXECUTION AND RISK MANAGEMENT FOR INSTITUTIONAL INVESTORS

                             

BONDS UPDATE :

Many quarterly and monthly BOND YIELD charts are close to confirming a LONGTERM YIELD failure, in a similar fashion to some EQUITY markets.

The next BIG TRADE is US STEEPENERS : As mentioned before many RSI’s are WAY over sold and the recent POP to the 61.8% rets served to recognise the BIG BREAK level. If we close above any of the 61.8% rets this should TRIGGER a sustained long-term steepening. Analysing the charts it looks LIKE US 5-30 or 10-30 the ideal steepener in the US.

1. Yields are close to breaching levels where we will see a MAJOR DROP
2. (US 5yr and UK 10yr). ALL durations are stretched, quarterly, monthly, weekly and daily… this is RARE!
3. Looking at the previous Equity piece, European stocks look a LONGTERM failure thus I firmly believe this mean BONDS rally.

3)   Germany 26’s bonds based well as do the FUTURES post yesterdays intraday REVERSAL.

4)   UK yields have a LOFTY RSI and UKTI POISED to bounce. UK 10yr all eyes on a continued breach of  1.489 (10yr Gilts).

• image001.jpg@01D21F13.B69A4950">

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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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• •             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. 
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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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By Takashi Nakamichi and Tesun Oh
(Bloomberg) -- The Bank of Japan will likely find it easier
to make its inflation target less binding if recent scandals
throw Prime Minister Shinzo Abe from power, according to
Takahide Kiuchi, a former board member at the central bank.
“If the unusually strong administration changes, the Bank
of Japan could get a little more freedom,” Kiuchi said in an
interview Tuesday. The BOJ has faced “considerable political
pressure” these past five years, he said.
“If the Abe administration is replaced by another
administration, it could become easier” to re-frame the
inflation target as a medium- to longer-term goal, said Kiuchi,
54, who is now executive economist at Nomura Research Institute
Ltd. in Tokyo. The BOJ, which is by law independent from the
government, has said it wants to reach its price goal at the
earliest possible time.
The BOJ’s policy path could come under fresh scrutiny as
speculation intensifies over Abe’s future because of scandals
that have prompted a series of public apologies and driven his
poll numbers to near record lows. Kiuchi, who served on the
BOJ’s policy board from 2012 to 2017, was one of its perennial
dissenters, saying that achieving 2 percent inflation isn’t
feasible and that trying to do so could have a negative impact.
In a Bloomberg survey of 49 economists before last month’s
BOJ policy meeting, 68 percent of those expecting the central
bank’s next move will be monetary tightening forecast such a
move in January 2019 or later.
While BOJ Governor Haruhiko Kuroda has repeatedly said he
is committed to easy policy to reach the price goal, Kiuchi
suspects that the bank is moving toward normalization, citing
its reduced purchases of government bonds. If Abe steps down,
the price-target change could come around next year, Kiuchi
said.
Abe must win a leadership vote scheduled for September by
his political party to stay on as premier. While Abe has said he
would stay in his job and work to restore public trust in the
government, a poll published by the Asahi newspaper on April 16
showed respondents would prefer to see former Defense Minister
and Abe critic Shigeru Ishiba as the next leader. Ishiba said in
an interview in June last year that it wouldn’t be good if the
unprecedented easing policy continued indefinitely.
The BOJ could scrap its negative rate policy in late 2019,
provided that the government delays a sales tax hike scheduled
for October of that year, Kiuchi said. “What will likely come
first is the termination of negative rates or a reduction in the
purchases of exchange-traded funds,” he said.
See also: Kiuchi says BOJ will stay on ‘virtual
normalization’ path
It may be in 2021 at the earliest when the BOJ begins to
cut its corporate bond holdings accumulated as part of its
stimulus, Kiuchi said.
Ahead of such changes, the BOJ may also redesign its long-
term interest-rate target if there is little risk that that
would cause the yen to rise, Kiuchi said.
One option would be for the bank to scrap its zero percent
target for the 10-year government bond yield and make it a goal
for the five-year yield instead, he said. The latter rate would
be “far easier to control” partly because it’s less sensitive to
developments in overseas bond markets, he said.
“This will depend on market conditions so it’s hard to tell
when that could happen,” he said of the possibility of a change
to the 10-year yield target. “But it will probably come ahead of
the termination of negative rates.”

• Cable strength is forcing the EUR GBP bollingers wider confirming this as  HUGE trend for the next few years!
• The EUR USD, is still yet to breach the all-important 1.2167.
• USD EM has seen many BLOW OUT scenarios but a TOP might be in for USD RUB and USD TRY.
• USD CAD has been a major call and bounced well from the moving average. This should persist now we are above the 1.300 level.

• image001.jpg@01D21F13.B69A4950">

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• 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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• •             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.
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• •             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. 
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• •             Chris

 

On my Radar is the following idea

Trade Mechanics

• Sell Btps 4% Feb/37
• Buy Btps 5% Aug/39
• +15% contract curve hedge +RX/-UB

 

• €50k/DV01, Sell €29.5MM Feb/37 into €25.1MM Aug/39
• And +54 RXM8 contracts & -25 UBM8 contracts

 

Levels

• Current @ +7.8 bp
• Enter @ +8 bp
• Add @ +10 bp
• Target @ +6 bp
• Stop @ +12 bp

 

Cix & History

100 * ((YIELD[BTPS 5 39 Corp] - YIELD[BTPS 4 2/37 Corp]) - 0.15 * (YIELD[DBR 3.25 7/42 Corp] - YIELD[DBR 0.25 2/27 Corp]))

 

 

Italian excess return vs Germany

Below is a graph of Anomaly value of Italian curve

- we create this by taking the German curve and multiplying it by a constant and adding a shift – this represents the best fit Italian curve as a marginal excess return function over German bonds

- We then subtract actual Italian bond values from their expected value using this form

• Yields are adjusted to compensate for coupon differences by adding the difference between z-spread and i-spread

 

Rationale

• After creating a ‘synthetic’ Italian curve using an amplified shape of the German curve we can elucidate the wide range, relative opportunities on the Italian curve
• Generally the Italian curve is approx. 1.8 times as steep as the German curve, and that’s reasonably consistent throughout the curve
• Although the Italian 10s30s segment isn’t quite as steep, we can see that the gradient between high coupon Btps 4% Feb 37 and Btps 5% Aug 39 is significantly steeper than elsewhere
• These specific issues are 1.37 Standard dev rich and 1.16 Standard dev cheap with respect to the Bloomberg GOVY model (Spline Cubic fit, 3M History)
• We use an amount if +RXA vs -UBA to hedge the generic curve movements of European Govt long end -and for hedging efficiency

 

Carry & Roll

• Btps segment (using 10bp repo spread)

Carry -0.1bp/3mo, Roll -0.3bp/3mo

• RXA/UBA segment (weighted by 15%, using contract implieds)

Carry +0.2bp/3mo, Roll +0.3bp/3mo

 

• Nett C&R +0.1bp

 

Risks

• The Btps Feb/37 stay bid due to market shorts
• The Btps Aug/39 stay offered until they hit a wider range notion of cheap

 

 

 

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

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

 

 

Logistics and retail lead the way as companies compete for labor

The weekend’s events have done “little” to effect the markets BUT we are failing at the MAJOR bollinger averages therefore the BIAS remains for LOWER. It will be interesting to see if the bollinger averages work!

** REMEMBER ALL EYES ON EUROPE, ESPECIALLY FTSE, they led the way before **

Post Mark Zuckerberg HOUSE grilling I was personally was not impressed.

It seemed to blame the public for using the platform and freely offering their details. If banks sold peoples personal information, they’d face millions in fines. Am sure regulation will catch up with this sector as long as that is BALANCED with FREE surveillance for government bodies.

The NASDAQ IS NOW close to EMULATING the 2000 DROP (see page 16).

German and UK bonds are helping the cause given they are posting NEW JUNE highs everywhere.

As mentioned I still fancy an old fashioned stocks DOWN bonds UP and bonds are HOLDING.

** KEY CHART FAILURE LEVELS ARE 2, 16 and 17. **

• image001.jpg@01D21F13.B69A4950">

•  
• 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

 

Former PM Koizumi says Abe will harm party candidates in
parliamentary elections.

By Anna Fifield

(Washington Post) -- SEOUL — President Trump and Japanese Prime
Minister Shinzo Abe will have something new to bond over when
they meet at Mar-a-Lago Tuesday: how to weather a storm of
relentless political onslaughts.

Both are embroiled in controversies surrounding dodgy financial
deals but, while Trump's poll numbers are holding up, Abe's have
plummeted to record lows.

The Japanese leader is flailing so badly that former prime
minister Junichiro Koizumi has suggested that he should stand
down at the end of June to avoid tainting the entire Liberal
Democratic Party.

"When the current Diet term ends, that would be a good time for
Abe to resign. No third term for him as the party president,"
Koizumi, who was prime minister between 2001 and 2006, said in an
interview published by the weekly magazine Aera on Monday.

The current session in Japan's Diet, or parliament, finishes on
June 20.

The scandals percolating around Abe will affect next year's Upper
House election, the former prime minister said. "Candidates will
get anxious if they have to go into an election with Abe."

Polls published on Monday showed Abe's steadily-tanking ratings
have fallen further in recent days. One, from the Nippon News
Network, put his approval rating at 26.7 percent, almost four
points down from March and the first time it has fallen into the
20s since Abe returned as prime minister in 2012.

Other polls put Abe in the 30s, but this is a far cry from the
support levels in the 60s he was enjoying at the beginning of
last year.

As many as 50,000 people protested outside the Diet over the
weekend, calling Abe a "liar" and urging him to resign.

The LDP, which has been in power for all but five of the years
since it was formed in 1955, changed its rules last year to allow
leaders to seek a third term at the helm. At the time, Abe seemed
a shoo-in to serve until 2021, which would make him Japan's
longest-serving prime minister and give him a chance to pursue
some of his controversial goals.

But in the ensuing months, he has been plagued by a cronyism
scandal that won't go away but has yet to be damning enough to
topple him.

Abe has not been able to shake allegations that his government
gave huge discounts in land sales to two educational institutions
linked to associates of he and his wife, and then tried to cover
up the links.

The Finance Ministry last month admitted to altering documents
relating to the sale of land in Osaka to a nationalist school
with links to Akie Abe, including deleting her name and the prime
minister's name from the papers.

Taro Aso, the finance minister and deputy prime minister,
resisted calls to resign over the admission, a move that would
have been politically fatal for Abe, analysts said. Abe and his
wife have denied all wrongdoing.

Now, the Finance Ministry is in further hot water after
allegations — backed up with audio recordings — that its top
civil servant had been sexually harassing female journalists on a
regular basis.

Junichi Fukuda, vice finance minister, has strongly denied
reports by the Shukan Shincho magazine that he made sexually
suggestive comments to female reporters during drinking events
and has said he will sue for defamation.

The magazine is standing by its reporting and released a
recording Monday in which a man, alleged to be Fukuda, says to a
female reporter in a restaurant or bar: "Can I touch your
breasts?"

Abe's government has so far deflected calls to fire Fukuda but on
Monday the ministry opened an investigation into his conduct.

The ministry has also asked any female reporters with similar
experiences with Fukuda to come forward, a call that would have
been unimaginable before the "Me Too" movement.

The prime minister can't even play up his strong ties with Trump
since the American president has been publicly attacking Japan
over trade and did not grant Japan the exemption to new steel
tariffs that was given to other allies.

While signing the tariff order, Trump says that Abe will have "a
little smile" on his face when they talk. "And the smile is, 'I
can't believe we've been able to take advantage of the United
States for so long.' So those days are over."

Abe was "blindsided" by the tariff decision and by the sudden
burst of diplomacy with North Korea, said Sheila Smith, senior
fellow on Japan at the Council on Foreign Relations.

"Anxiety has grown in Tokyo over the prime minister's 'special
relationship' with Trump," she said.

Abe had wanted a third term to tend to unfinished business:
namely, revising the pacifist constitution for the first time
since it was imposed on Japan by its American occupiers after
World War II. Abe wants to amend the clause denying Japan a
full-fledged military and cast off some of the postwar shackles.

This issue has been contentious in Japan, where many people think
seven decades of pacifism has served them well. The steady
barrage of missiles from North Korea last year, however, helped
Abe make his case for a stronger military.

Now, though, diplomacy is front and center, with the South Korean
President Moon Jae-in preparing to hold a summit with Kim Jong Un
next week, and Trump planning his own meeting with the North
Korean leader in May or June.

anna.fifield@washpost.com

Euro Govts, the week ahead – 16^th April to 20^th April

 

Supply

 

Germany 10y, Wed 18^th April - €3Bln 10y

 

Contract Trade

Seeing 10y as cheap and Rx contracts as rich – like the structure that really revolves around the richness of rx contracts
{DE} +24 -RX +28

Cix: ((YIELD[DBR 0.25 2/27 Corp] - YIELD[DBR 1.75 2/24 Corp]) - 0.8 * (YIELD[DBR 0.5 2/28 Corp] - YIELD[DBR 1.75 2/24 Corp]))

Weighting: 20/100/80

 

Currently:        -2.6bp,

Target:            -3.0 bp, pay the spread

Objective:        -1.5bp

 

 

Ask for further details and write up

 

 

 

Supply

 

Spain 4y, 10y & 15y, Thurs 19th April – Est. €4-5Bln

15y trade
15y – micro locally rich on the model, but much better value as a 15y point on the curve relative to Italy or France – generally with an improving credit, the 15y should do well vs 10y and 30y…
For a quick turn like
{ES} -27 +33 -46
cix: 200 * (YIELD[SPGB 2.35 7/33 Corp] - 0.5 * YIELD[SPGB 1.45 10/27 Corp] - 0.5 * YIELD[SPGB 2.9 46 Corp])

Weighting: 100/200/100

 

Currently:       +11bp

Target:            +11.5bp receive the spread, (timing by Wednesday)

Objective:       +8bp

 

 

Ask for further details and write up

 

 

Supply

 

France 3y, 5y & 6y plus linkers, Thurs 19th April – Est. €6-7Bln

Special tap in Frtr 11/24 (6y)

 

The 6y to 8y tenor in core trades rich on any fitted curve so not much to say there

France is historically flat 5s10s and on box versus Germany 5s10s, but again this is not wholly inconsistent with ongoing narrowing of the France / Germany credit spread (OAT/RX)

 

RV 11/24 vs 5/26 trade

Even after accounting for the richness of the German 6y – 8y France still looks over priced here and just see this micro opportunity

 

{FR} {GE} +frtr nov/24 -frtr May/26 & 28% -OEA/+RX

Cix: 100 * ((YIELD[FRTR 0.5 5/26 Corp] - YIELD[FRTR 1.75 11/24 Corp]) - 0.28 * (YIELD[DBR 0.25 2/27 Corp] - YIELD[DBR 1.5 2/23 Corp]))

Weighting: +100/-100/-28/+28.         24s/26s/oea/rxa

 

Currently:       +5.2bp

Target:            +5.0bp pay the spread, (timing by Wednesday)

Objective:       +8bp

 

 

Ask for further details and write up

 

More details on the ongoing themes

 

Love to catch up

 

 

James

 

 

 

James Rice

 

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**We are entering a potentially explosive situation over the weekend with Syria and MANY equity markets are testing KEY BOLLINGER AVERAGE resistance.**

Post Mark Zuckerberg HOUSE grilling I was personally was not impressed.

It seemed to blame the public for using the platform and freely offering their details. If banks sold peoples personal information, they’d face millions in fines. Am sure regulation will catch up with this sector as long as that is BALANCED with FREE surveillance for government bodies.

The NASDAQ IS NOW close to EMULATING the 2000 DROP (see page 16).

German and UK bonds are helping the cause given they are posting NEW JUNE highs everywhere.

As mentioned I still fancy an old fashioned stocks DOWN bonds UP and bonds are HOLDING.

** KEY CHART FAILURE LEVELS ARE 2, 16 and 17. **

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Bottom line: Today’s ECB minutes reinforce the reluctance to call an end to accommodation. In light of this, I’m looking at selling the risk of short-rates rising significantly before the June ECB meeting.

 

Trade:

Sell EUR 995mm 2m3y1y mid-curve payer atmf+10bp (k=0.904%)
Buy EUR 210mm 2m5y5y mid-curve payer atmf+8bp (k=1.672%)
Expiry 14-Jun-18

For zero-cost indicative mid. Equivalent to EUR 100k/bp of the underlying swap.
(ABB 6s on both underlying swaps)

 

Forward strike entry at 76.8bp, vs spot 3y1y/5y5y at 81.2bp.

 

 

Rationale: Over the medium term I see the EUR curve flattening, as the ECB eventually moves to adjusting the deposit rate higher. However today’s Minutes of the 8^th March meeting show little indication to rush and if anything reinforce the cautious approach of the majority of board members. To me this was the key section:

“The view was put forward that the Governing Council’s criteria for a sustained adjustment in the path of inflation could be assessed as close to being satisfied over a medium-term horizon. However, the broadly agreed conclusion was that the evidence for a sustained rise in inflation towards levels consistent with the Governing Council’s inflation aim was still not sufficient.”

 

The next meetings are on 26^th April and 14^th June, so it is no coincidence that I have chosen a 2m expiry, which comes the morning of the 2^nd meeting. The basic premise is that with the ECB sitting on its hands, the realized volatility in the 3y1y rate should undershoot the implied volatility and the realized volatility in longer rates. This reticence is mirrored by the market implied volatility on mid-curve options. The chart shows atm implied volatility for 3y1y and 5y5y mid-curve tails. Implied vol for 1m3y1y is relatively low (certainly lower than 5y5y) and picks up for 2m expiries (to be higher than 5y5y).

 

 

Thus it is attractive to sell volatility on 2m3y1y against 2m5y5y. The directionality of the curve has been inconsistent. In the most recent past (ie since mid-Feb) the curve has been bull-flattening. Since the upside to short rates appears capped in the near-term (if my read of the ECB’s intentions is accurate), I am willing to sell payers there and enter a bear-steepener as longer-rates drive the curve.

The vol differential for 2m expiries means that premium can be taken out of the trade. Alternatively, the strike can be set atmf+10bp on the 3y1y and only atmf+8bp on the 5y5y, which gives a further 2bp margin at expiry. In rate terms, the steepener has positive roll-down over the lifetime of the trade. Put together, the forward strike entry is 4.4bp below the spot 3y1y/5y5y spread. In addition, roll-down of the vol surface favours being short vol on 3y1y compared to 5y5y which adds another 0.9bp of rate cushion.

 

The main risk to the trade is that the market sharply reprices (ie brings forward) the ECB’s tightening of conditions. By moving both payers out of the money (and taking into account the rolldown), I’ve tried to build a buffer but the risk is still there. That said, elsewhere in the ECB statement they nodded to the current risks to global trade so if there were a significant flight to quality move and rally in the belly (eg 5y5y) that might be expected to temper any appetite for rate hikes.

 

As always, love to hear your thoughts!

Best,

 

David Sansom

 

 

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