Ive been long bods for the last year in Macro Insiders. I paused for a while and this is a re-entry.

Re: Paul S There is always a risk rates rise because of both market forces and unforeseen government policy. These are very treacherous waters.

Any risk that rates will come back up in the next two weeks from unforeseen market forces?

It was only this morning the Fed announced they will do infinite QE and he was also waiting for confirmation in the charts I guess. Otherwise it could have taken longer to play out?

maybe half of the boat... also any updates on UUP?

That is why they have been correcting. The Fed are dealing with that.

@Derrick. I use Saxobank.

How about TYD calls for June?

@ Steve S Where do you trade ZTMO, I don’t see it anywhere. Even Google search, nothing.

@Andrew. This is a fantastic observation. Much more leverage on 2 year and hence can squeeze more juice out of the trade. ZTMO is the ticker

I was thinking a similar strategy after seeing, Raoul write, "buying one of the parts of the curve you like for a trade makes sense. I think all parts of the curve work." With favorable probabilities it seems like the perfect time to deploy leverage.

Yup Take your pick where you think is your best risk reward.

Julian is bullish precious metals. For exactly these reasons. Naturally the other side of this trade is whether there are still liquidation flows out of gold. Cash is very tight right now. A lot of margin calls going on.

Julian suggested dipping into silver in his latest flash update (see his recent video). I'm betting Raul and Julian are both waiting for the right time to get back into gold (believe both recommended gold last year, before it spiked up). Bitcoin, the 10yr and the euro dollar (for now), all seem to be a similar play from Raul's camp. Silver from Julian's camp. I've heard arguments, outside of MI, that gold had been overbought and that, perhaps, some will need to sell to cover losses. Patience is probably the most prudent strategy, these guys will give you the green light on gold when the time is right.

Remember, back in 2008 gold fell as well. And it was falling before today, no surprise. In my opinion, the only people selling gold are people who need cash immediately, and gold is a liquid asset they could unload. But everything the fed and govt are doing now is bullish for gold, and as QE4ever continues, I think gold will continue to rally. As a gold owner, it isn't the collapse of assets i'm looking at, but the govt and cb intervention that will force it up.

John, have asked myself same question... during chaotic dash to QE for everything, forever plus return to NIRP/ ZIRP and liquidation of equities and then bonds, gold was unable to sustain new highs above 1,700. Perhaps last fall in price due to liquidation before pushing higher? I don’t know, but interested in people’s views.

Yup. I might be wrong on timing (i.e it could take more than 2 weeks) , but it should get there in due course.

June

Yup

Its either ZNMO for June or ZNUO for September. Hoping Raoul can clarify.

Thank you Raoul. Appreciate your response.

No, front month is find and then you can roll it into Sept in due course.

n00b question: What are the key structural issues with dollar shortage?

I think long-term, I'm with you, the dollar collapses. Shorter term, dollar funding seems to be a major problem, more than people realize. And I don't think its priced in yet. In addition, I don't think QE will be ending anytime soon, because as much as this is a health crisis, this economy was a bubble long before the coronavirus existed.

Im still long dollars and the $13trn shortage of dollars offshore is one of the biggest structural issues the world faces...

The rest of the world will do even more.

Im not sure I think of them as low risk anymore. Your entry price here doesnt afford good risk-reward. And there are some very cheap pieces of paper out there now. Vol is not low either. Personally if bearish I would be looking at other things.

Much worse naturally.

Thank you for taking the the time to answer all these questions!

Im expecting minor-OIS to get close to zero. That is what the Fed wants. June is a short period for all the action to be price in

June - not sure. Sept yes,

Patience, my friend.

In my opinion no. Quite the opposite. My glass is only half full, but the Fed's actions are indicative of a horrible battle with economy wide de-leveraging. The Fed is furiously releveraging to offset the credit system attempts to de-lever. That means different assets might perform very un-intuitively. If there is leverage in a trade go the other way. For example, there is no way Risk-Parity funds have exited their positions yet. You will be right when the financing pressure has mostly corrected. That isnt yet. I will say Julian is quite bullish precious metals. If the spec positions are out (which might be so) the unlimited monetary intervention suggests precious metals might have a long way to go.

No idea. I treat each asset class separately in any event. Better for risk management

how long are you thinking? and why? thanks Raoul

Sure, my view is to try to look through that bounce. When currencies trend, they really trend. We might get a 3% or so bounce in the middle but my time horizon for this trade is longer.

The lower they get rtes, the lower the funding costs on all liquidity providers and the lowers the real rates are. They need to go hugely negative at this point.

Already getting those texts from tenants? Thats quick.This is a key point. There is a liquidity issue and a solvency issue from a lockdown. I dont see liquidity as an insoluble problem if the Fed does its work. But the solvency issue will still be there. Those tenants who run up arrears may or may not end up paying them. Some definitely wont, and will just move on.

Chris D makes a very good point. If you are worried about banks, and funding, why wouldn't you be a little worried about whether unsecured funding remains available? Libor is an unsecured funding rate and could potential widen significantly in the CV19 shutdown. Raoul points out that the Fed is committing serious resources to normalizing markets, but there is still some risk (probably small but who knows) they fail.

Chris, how *long-dated* might a call have to be to reasonably mitigate this libor risk?

Chris, thanks for the info. If libor blew out 200 basis points I guess that would mean virtual complete loss of option-capital (whilst that continued). Since the Fed is already going full in generally, what would you think the risk of this occuring over the next 2 weeks? Scale bets accordingly, I take it. Thanks again for your advice.

Be careful on ED calls, there is LIBOR risk in it, it can't get to 99.9 or 100 (assuming 0-0.25% rate bound) as you have to take off implied FRA OIS spread for Dec 2020 (if you buy GEZ2020), and that has been quite volatile recently. It's always at least 10bps, but in 2008 it ballooned to 200bps or so, now Dec 2020 will be discounted to this, it's been about 60-70% of the current FRA OIS spread more recently - you can measure this by looking at the difference between ZQX2020 (which is a PURE rate play) and GEZ2020 which is NOT a pure rate play, it's a LIBOR play. The two contracts above (deliberately Nov 2020 for ZQ as the Dec 2020 contract is after Fed Dec meeting) are also not measured in precisely the same manner, CME's website describes how they are measured. This isn't an issue for longer dates calls, but it's a major thing to bear in mind for current month calls as ZQ = average of the trading days in a month, and GE is a snapshot I know several people who have been wrong footed by this (they contacted me on twitter as I was tweeting about this), they didn't understand the trade properly (but in general they bought in 2019 so they were fine and got out recently at a nice 3-5x profit), they thought Eurodollar was a pure rate play on US rates - it really really really really is not, it's a pure rate play on LIBOR Caveat emptor

Daily vol = annual vol / 16 (as a percentage) Cos vol = std/(sqrt time) Usually vol is annual - so to convert to daily we just divide by the sqrt of time. In days that's sqrt(number of trading days), which is sqrt(252) = approx 16 This gives you the % daily move. Multiple by, security price for the move in price terms. As for sizing, I would suggest you use common sense first of all. Whats the biggest move you can imagine. Now run that against the security you are interested in. Too big a loss? Whats stop would you set? Can it gap through the stop? I could give you stories about my pathetic attempts to short Tesla which might evoke some sympathy. Or you might just think, "what kind of idiot shorts Tesla?".

Any good online calculators out there that would help with sizing decisions? Or, step by step articles?

Harry, Would you mind giving an example of your vol calculation and application as it pertains to 10yr Treasury futures? (And where to/how to calculate the vol on this instrument—just use the TYVIX?). Thanks!

Gross exposure is a bad measure. Use vol, and calculate a daily expected move. Vol/Sqrt(252) or vol/16 is roughly the daily % move. You will get a 2 St.Dev move about 2-3 times per year. So bear that in mind when you are sizing positions.

I sized based on an estimate of the move I am expecting and the vol that generally prevails. Also I take into account my upside downside calculation. The latter consideration deals rules out bets where I place my stop such that I dont get a better than 3:1 payout. The former consideration takes into account "slippage". Markets can gap, and one should size such that ones account is jeopardized by a gap. But its part of the nature of the game that once in a while you will size incorrectly, and get a black eye from an adverse move. For some reason toast lands butter side down, and similarly you will find that more of these moves are against you. Or maybe I just remember the moves where the market hurts me better than the ones where it helps me.

My mistake - they are exactly the same - just different symbols https://www.barchart.com/futures/quotes/ZN*0/profile

One is a "mini" version of the other. They trade at the same price.

The dollar shortage happened cos US banks were stretched on their balance sheet utilization. I think there should be a deep dive explaining precisely what happened. We are now watching the Fed try and triage the situation in real time. But the entire global dollar balance sheet has been deleveraging. You need a lot of Fed balance sheet to offset that. So even if the Fed is trying its best to offset that private sector deleveraging, its not guaranteed to be successful in the short term. In 2008, there was a first wave of deleveraging caused by the paralysis of the banking system. Then there was a second wave, when foreigners realized they had huge losses on their dollar securities and needed to sell their local currencies to make pay their dollar account margin calls.

from an options perspective, TLT is a bit more liquid than IEF (+ others)

I think RP is just super bullish govvie bonds. In which case, the leverage provided by longer duration might outweight the fact that you are further down the curve.

Tell me about it! I got stopped on on efforts to buy it. Maybe that tells me more about how bad a trader I am. But even if you have the right idea, it aint easy to keep the trade.

Keep an eye on the Fed. They are working overtime trying to fix the problem. I would rule out their eventual success. They have a printing press on their side.

TLT, btw

..until someone actually starts ordering these beds ! I mean, we just heard that FEMA can only ship 400 respirators to NY.

how long are you guys holding this for cheers

You’ve got a good bit of company.

No, you are not alone :-)

Smart observers (Kaplan at Dallas Fed) estimate 12% unemployment by the time this is done. Thats not the most interesting number from my point of view. The most interesting number he game was his year end estimate of 7% unemployment. That suggests a degree of persistence in the real economic recession. Doesnt bode well.

Some perspectives. Shifts in the jobs markets. Non-food retailers in Germany report daily losses of 1B Euros and Eurocommerce (Federation representing 6M retailers) is asking for a government bail out. In Belgium 60% of food related companies report labor shortages due to lock downs and the are asking the Government to tap into the unemployed to fill the gaps (FEVIA, Belgium Food Industry Federation). These shifts will increase. Economies are being stretched.

Forgive but Im not really familiar with UUP calls. I will look up. I tend to use PhillyX futures, or similar minis. The Fed is doing its best to mitigate the squeeze on dollars right now so keep an eye on Fed moves to establish bilateral swap lines with other central banks.

I hope this plays out well before Jan... my calls expire Sept!

I'm using the UUP Jan 21 $30 calls to build a position. So far only a 1/4 size has been put on and now waiting for more consolidation in DXY to layer in additional exposure. The helicopter money in the coming days will hopefully give us a pause in the DXY to add long exposure. Lets see! Scaling in and position sizing based on individual parameters is key imo. Good luck!

@Dimple would you be comfortable sharing a bit about how your trade is implemented? As I go through comments I notice I am not the only person wondering what the timing and target is for this play. I have UUP calls but the devil is in the details, it would be tragic to trade based on a correct theory and still lose due to simple mistake on choice of security, timing, strike.

Tick size... rookie error, disregard :)

Thanks Harry

Till it stops working. Trailing stop is a good idea for these kinds of situations. Look at Japan for ideas on how far bond markets can move when there are serious concerns for wealth preservation in financial systems.