Case Study
of STIR Trading in Active Markets
[note this post is as of Saturday night]
I have no idea what will happen in the next few days in news or the markets, so I thought I would do something a little different this week. I included an email I sent to institutional clients, as an example of how I think about positions in real-time.
There had been a clear belly-led rally in recent weeks. We started off with everyone in potentially misguided steepeners (short the belly) getting out. Then we got data that favored flatteners (high inflation, lower growth) that caused even more stops. NOW, we have “war” in Iran, a potential banking crisis and month-end trading.
What is different from last summer’s brief Iran attack is that we are now going for regime change. My email late Thursday outlined domestic reasons for a potential crisis-tail and potential trades. It turns out that “domestic” crisis protection trades also works on international crisis as well. This Blind Squirrel had some time to consider what is going on in the belly of the curve and wanted to share some preliminary thoughts on the current state of the yield curve. The Bitcoin and equity post(s) will have to wait.
But first the very long week in news:
· The week started off with a dire AI scenario presented by Citrini:
The few times I have heard him on podcasts, he seemed pretty solid. But I don’t trade equities or commodities so I don’t read him regularly. I agree his scenario IS a possibility. However, two years from now is laughably short. It’s like when the Microsoft exec said a few weeks ago that most white-collar tasks will “be fully automated by an AI within the next 12 to 18 months.” I am lifting that time offer ALL DAY. Maybe they should just shoot to have a web browser that doesn’t suck in 12-18 months. That’s a more realistic goal for that time frame. The Word grammar checker is like from someone who just got off the boat. You need to be able to crawl before you can become an Olympic pole-vaulter. The reason why timing is important is that time gives the economy time to adjust. Otherwise there could be an economic shock if firms started laying off like half their workforce…
· Jack Dorsey threw gasoline on the AI fire last week by cutting over 40% of Block’s workforce. Block stock was up 20%. There was some discussion of whether this was an isolated incident of prior over-hiring or a sign of the future. A lot of execs swimming in stock options probably took notice and are asking questions about headcount.
· Market Financial Solutions went belly-up. Who is the marketing Nostradamus who came up with “MFs” as the name of that financial company? They are being called that in creditor offices around the world, so the decision was prescient. On a side note, a family member’s first name initials are A-S-S (in chronological order). People don’t think about initials much. But I digress. Bank stocks fell 5+% on Friday. I remember the good old days when the STIR future was Eurodollars and the spread to Fed Funds would widen on such an event. Now we have one less thing to trade. I digress again. While the private equity/debt issue has more to go, it’s unclear the economy as a whole will get dragged down. The Fed is more likely to resort to macroprudential tools than ease. However, March 2023 and the 100+ bp rally is still in traders’ minds.
· Waller said a March cut is a coinflip. 50% is high when the Fed Chair race is essentially over. It could come down to an extremely weak payroll, which seems unlikely based on other indicators. However, a high Unemployment Rate can’t be ruled out.
· The main nugget I got from listening to Trump’s 2-hour nails-on-chalkboard SOTU was that he wants to match $1000 for those with no employer match retirement plan. I have no idea how he would pay for that, since Google says there are 63million workers without a match, and therefore would cost $63B per year. And let’s not forget the proposed $500B annual increase in the military budget. It’s not like his tariff plan was struck down and the US may be on the hook for refunds.
· All this proposed extra spending couldn’t sell off long end. This is yet another sign that the bond vigilantes are dead (for now). Tens ended the week at 3.937. I am pretty sure this exceeded most Street economist projections for the end of February. A lot of people were scratching their heads, but I have some thoughts…
Case Study
As mentioned in the intro, we had a cascade of stops on steepeners. However, even I was surprised the belly just kept rallying further than I thought. This was an email I sent to institutional clients late Thursday:
