The Bond Review

Discussion in 'Journals' started by ChiBondKing, May 14, 2007.

  1. Howdy-

    After being on ET for a few years, and posting bits and pieces here and there, I decided that maybe I should give the journal thing a whirl after much trepidation (weighing the pros vs. the cons). First, I must warn you that after being on a desk for anywhere from 8-12 hours a day, sitting down to write recaps and identify trends in lengthy posts is not exactly my cup of tea, so there *may* be some times where I don't post, but I will always try to answer any questions and encourage educated, non-bashing commentary and observations. C'mon ET, I know we can achieve that.

    Before I begin, I'm on vacation later this week, so from Thur-Monday you will not see anything from me :)

    I saw some interesting research today, and I've been looking at the repurchase (repo) bond market for quite some time. For those who are not sure what a repo agreement is, check out this post:

    So, I was reading this post from a friend who got this from a fairly prominent analyst over at ICAP, and I was intrigued to see repos at their highest since...well, ever. Reverse RP agreements were kinda high, but no at their peak from 2005-06 (although we're right back at that level)

    What does this tell me? (see chart labeled Repo attached). With the bond futures reporting all time highs in short interest, specifically in the 2Y bond future, the picture is looking very interesting here. There's a lot of people out there shorting the cash bonds, as well as shorting the futures, in an overall bet that we could head lower. There's also a lot of people out there lending these bonds at some pretty sweet repo rates as well. While the LTCM auction spread trade has obviously been proven wrong, what could these players be doing exactly? Pretty simple. There's quite a few trillions of dollars out there betting on a rise in US interest rates in the winter. The analyst went out on a limb to predict that there will be a collateral squeeze in the repo market, and the net issuance of treasuries coming out of the fed could actually turn negative (has happened in June 2006). In looking at this, I could see that we're setting up for another sizeable squeeze in the repo markets this summer, the analyst saying around the June-July.

    So, what does this mean? For one, I am concerned, given the current Hedgie community, that perhaps there is another LTCM sitting out there somewhere, leveraged [perhaps not as bad as LTCM, but ... ] and given the "powder-keg" buildup of the repo market, and the seemingly foreseen collateral shortage in the repo market, that a bust could cause the shorts to unwind, quite violently, and in turn the holders of the bonds are dumping. Perhaps I'm a pessimist about these things, but it's these things that we worry about down here on Wall.

    What are your takes on the bonds and the short interest buildup? Forgive me for such a yawner of a first post, but i'm worn out :)

    Have a good day,

    Quick summary:
    2/5 cash spread ended the day -12.3 (bloomberg composite, ML, MIZU, JPM, CANT, ICAP contributors)

    Bonds widespread selling, not too heavy, slight bid into the NY cash close, but a very narrow tick range into tomorrow's CPI. No read on it, staying flat as this is vacation week for me :)
  2. basis


    I'm not a fixed income trader, so maybe this is naive, but why does high short interest mean there are a lot of short bets? Why can't they just be long corporates, short CDS, etc. against?

    (If my suggestion is true, your short squeeze argument is probably MORE correct.)
  3. dhpar


    ChiBondKing, looking forward to your journal...
    good luck :)
  4. CBK, keep us up-to-date with your analysis next week!

    Bernard :p