Bond Trading

[DcifrThs]

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DcifrThs you are a book of knowledge [img]/images/graemlins/tongue.gif[/img]

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ty...i wonder if the fact that i read a lot of books has anything to do with it [img]/images/graemlins/tongue.gif[/img]

Barron

[dazraf69]

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DcifrThs you are a book of knowledge [img]/images/graemlins/tongue.gif[/img]

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ty...i wonder if the fact that i read a lot of books has anything to do with it [img]/images/graemlins/tongue.gif[/img]

Barron

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i wish i could retain that much information. photographic memory or do u have a secret?

[DcifrThs]

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DcifrThs you are a book of knowledge [img]/images/graemlins/tongue.gif[/img]

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ty...i wonder if the fact that i read a lot of books has anything to do with it [img]/images/graemlins/tongue.gif[/img]

Barron

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i wish i could retain that much information. photographic memory or do u have a secret?

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first off, there are tons more people who know and remember tons more than i.

i remembered and studied far less when i was in school.

now i love to read and study. makes a big difference in what you rmemeber imo. if you love what you read, you'll remember it more. when you have to read something, makes it harder...

thats all i can think of...

Barron

[CrushinFelt]

nvm [img]/images/graemlins/grin.gif[/img]

[DcifrThs]

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nvm [img]/images/graemlins/grin.gif[/img]

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i missed this post...can you trade CDSs?

if not, what exactly are your restrictions? can you only take full principle investments? what are you working with?

thanks,
Barron

[Miamipuck]

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I guess I should be more clear about my "bet" on countrywide. One of the main factors that has hurt this bond (increased the yield) is the assessment of CFC's default probability. I hold a view that the market has overreacted and thus believe I am receiving a higher yield than I should for my assessment of their credit risk.

The yield curve play is more of a "kicker" that will help my trade rather than being a main factor. I believe that IF the market's assessment of countrywide's credit risk comes back to earth, the yield will of course drop, and any fed rate cuts that may be implemented between now and then will also help to decrease the yield.

Summary of my trade, worst case scenario I hold this bond 'til expiration earning the yield (receiving a higher yield than I "should" based on their probability of default, though I think there's very little chance the market lets them default). Best case scenario, their creditworthiness increases, the fed cuts the rate a few times over the next 12-18 months, and I sell the bond for a nice gain.

My next trade, if I were to make one which I won't because I'm taking things slow, would be to bet on the spread between the 10-year and 2-year treasuries tightening as the tension in the market eases. This is most simply done by just longing the 10-year and shorting the 2-year right? Would that fall under your "Steepening" (probably flattening in this case) category?

This stuff to me is much more interesting than plays on equities.

Thanks for the input.

Also, I'm not allowed to trade Fed Funds Futures because I work at the CME and I signed a piece of paper saying "NO FUTURES OR OPTIONS FOR YOU!" [img]/images/graemlins/tongue.gif[/img]

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A couple of thoughts......... I work on a municipal bond trading desk.

There is more at work in Countrywide bonds than the market thinking the company is/isn't going to be able to pay their debts as a going concern. Some other factors:

1.) The market is moving to more historical credit spread levels. For some reason the market did not learn it's lesson from 2000-2002. The credit spreads were ridiculously tight the last couple of years. I had been practically begging people to get rid of their off-rated bonds for app. 6 months. Some of the selling is normal repricing, the results of credit spreads widening. (If you need a more detailed explanation by all means say so)

2.) Baby and Bath water- Obviously you are seeing a "flight to stupidity" in this market. Many area's of the market that should be immune to the subprime mess are selling off (Muni's for example).

Last week Credit default swaps for Financial bonds (Goldman, Bear Stearns, Lehman etc. etc.) were trading as if the bonds were junk levels . Basically C.D.S.'s are swaps/pledges/contracts protecting the bond holder in the event of default. The reason I am mentioning this plays into your Countrywide position. Countrywide provided your analysis is correct will appreciate if/when the market reprices the risk associated to this company and/or the financials firm up in pricing.

Those are just a couple of things........

Also I wanted to say be careful with expecting Fed funds easing to immediately have an effect on your bonds. The fed funds rate or overnight rate has nothing to do with long term benchmark rates. You would expect the rates to go down obviously but in the environment we are in now that may not be the case.

An example: For a longtime we have had a flat to partially inverted yield curve. A Fed easing can certainly steepen the curve and make it more normal. However that would preclude long term rates from moving in concert.

Another example: (I am going from memory here and may be a little off, unlike Dcifr I most certainly do not have a photographic memory).

In June of 04' when the fed started tightening (raising) short term rates were 1.25% till June of 06 when they were 5.25. In that time long term rates changed hardly at all. So the short rates moved 400 basis points and the long term market moved maybe 50 basis points if at all.

Just a few examples of Fed funds rate cycles not really effecting the benchmarks much.

Anyway just food for thought. There is a lot of Jargon in my response sorry for that.


Edit: I just saw that you work on the CME so you probably knew what I posted already....

Further edit: Sorry Dcifr already touched upon CDS, I did not read his post prior to posting mine. Sorry for that.

[DcifrThs]

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[ QUOTE ]
I guess I should be more clear about my "bet" on countrywide. One of the main factors that has hurt this bond (increased the yield) is the assessment of CFC's default probability. I hold a view that the market has overreacted and thus believe I am receiving a higher yield than I should for my assessment of their credit risk.

The yield curve play is more of a "kicker" that will help my trade rather than being a main factor. I believe that IF the market's assessment of countrywide's credit risk comes back to earth, the yield will of course drop, and any fed rate cuts that may be implemented between now and then will also help to decrease the yield.

Summary of my trade, worst case scenario I hold this bond 'til expiration earning the yield (receiving a higher yield than I "should" based on their probability of default, though I think there's very little chance the market lets them default). Best case scenario, their creditworthiness increases, the fed cuts the rate a few times over the next 12-18 months, and I sell the bond for a nice gain.

My next trade, if I were to make one which I won't because I'm taking things slow, would be to bet on the spread between the 10-year and 2-year treasuries tightening as the tension in the market eases. This is most simply done by just longing the 10-year and shorting the 2-year right? Would that fall under your "Steepening" (probably flattening in this case) category?

This stuff to me is much more interesting than plays on equities.

Thanks for the input.

Also, I'm not allowed to trade Fed Funds Futures because I work at the CME and I signed a piece of paper saying "NO FUTURES OR OPTIONS FOR YOU!" [img]/images/graemlins/tongue.gif[/img]

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A couple of thoughts......... I work on a municipal bond trading desk.

There is more at work in Countrywide bonds than the market thinking the company is/isn't going to be able to pay their debts as a going concern. Some other factors:

1.) The market is moving to more historical credit spread levels. For some reason the market did not learn it's lesson from 2000-2002.

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markets never learn their lessons. i cite the entire market history of the world.

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The credit spreads were ridiculously tight the last couple of years.

[/ QUOTE ]

yup. in that scenario, being short credit spreads is great because they can't go negative.

[ QUOTE ]
I had been practically begging people to get rid of their off-rated bonds for app. 6 months. Some of the selling is normal repricing, the results of credit spreads widening. (If you need a more detailed explanation by all means say so)

2.) Baby and Bath water- Obviously you are seeing a "flight to stupidity" in this market. Many area's of the market that should be immune to the subprime mess are selling off (Muni's for example).

[/ QUOTE ]

yup, makes sense. finding good credits can be a great bet here. i made a post about that a bit ago re: goldman & lehman's corporate credits. didn't think about munis.

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Last week Credit default swaps for Financial bonds (Goldman, Bear Stearns, Lehman etc. etc.) were trading as if the bonds were junk levels . Basically C.D.S.'s are swaps/pledges/contracts protecting the bond holder in the event of default. The reason I am mentioning this plays into your Countrywide position. Countrywide provided your analysis is correct will appreciate if/when the market reprices the risk associated to this company and/or the financials firm up in pricing.

Those are just a couple of things........

Also I wanted to say be careful with expecting Fed funds easing to immediately have an effect on your bonds. The fed funds rate or overnight rate has nothing to do with long term benchmark rates.

[/ QUOTE ]

...yea, and you'd expect CDS prices to not treat firms like GS and LB like junk.

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You would expect the rates to go down obviously but in the environment we are in now that may not be the case.

[/ QUOTE ]

yup, can't be too sure of anything.

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An example: For a longtime we have had a flat to partially inverted yield curve. A Fed easing can certainly steepen the curve and make it more normal. However that would preclude long term rates from moving in concert.

[/ QUOTE ]

right, but a fed easiing could influence the market's perception of the ability of countrywide to secure financing to survive long enough to get into solid shape. the long end of a yeild curve not reacting to a fall in fed funds rate isn't exactly analagous imo.

further, if rates move down on sept. 18th i don't think the 10yr will move too much (since it is pretty much priced in and not too much more relative demand will likely pile into it). but if they don't, they'll move up a bit as those expecting the cut move out (not exactly rational but imo that will be what likelyhappens. the curve will shift up by a bit and come back from the steepness it is at right now if fed doesn't ease).

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Another example: (I am going from memory here and may be a little off, unlike Dcifr I most certainly do not have a photographic memory).


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i deifinatelyhave far from a good memory

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In June of 04' when the fed started tightening (raising) short term rates were 1.25% till June of 06 when they were 5.25. In that time long term rates changed hardly at all. So the short rates moved 400 basis points and the long term market moved maybe 50 basis points if at all.

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right, b/c of a few reasons that may not be pertinent in a panic like this. first off, the ability of fed to fight inflation was priced in. the curve flattened.

meanwhile, long rates were held artificially low by larger and larger investments (some 800bil) by asian and commodity exporting countries.

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Just a few examples of Fed funds rate cycles not really effecting the benchmarks much.

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that is true, fed funds rate may not affect benchmarks (i.e. 10yr i think that may be what you mean by "benchmark") much in those times, but these may be different.

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Anyway just food for thought. There is a lot of Jargon in my response sorry for that.


Edit: I just saw that you work on the CME so you probably knew what I posted already....

Further edit: Sorry Dcifr already touched upon CDS, I did not read his post prior to posting mine. Sorry for that.

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no doubt.

Barron

[Miamipuck]

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I guess I should be more clear about my "bet" on countrywide. One of the main factors that has hurt this bond (increased the yield) is the assessment of CFC's default probability. I hold a view that the market has overreacted and thus believe I am receiving a higher yield than I should for my assessment of their credit risk.

The yield curve play is more of a "kicker" that will help my trade rather than being a main factor. I believe that IF the market's assessment of countrywide's credit risk comes back to earth, the yield will of course drop, and any fed rate cuts that may be implemented between now and then will also help to decrease the yield.

Summary of my trade, worst case scenario I hold this bond 'til expiration earning the yield (receiving a higher yield than I "should" based on their probability of default, though I think there's very little chance the market lets them default). Best case scenario, their creditworthiness increases, the fed cuts the rate a few times over the next 12-18 months, and I sell the bond for a nice gain.

My next trade, if I were to make one which I won't because I'm taking things slow, would be to bet on the spread between the 10-year and 2-year treasuries tightening as the tension in the market eases. This is most simply done by just longing the 10-year and shorting the 2-year right? Would that fall under your "Steepening" (probably flattening in this case) category?

This stuff to me is much more interesting than plays on equities.

Thanks for the input.

Also, I'm not allowed to trade Fed Funds Futures because I work at the CME and I signed a piece of paper saying "NO FUTURES OR OPTIONS FOR YOU!" [img]/images/graemlins/tongue.gif[/img]

[/ QUOTE ]

A couple of thoughts......... I work on a municipal bond trading desk.

There is more at work in Countrywide bonds than the market thinking the company is/isn't going to be able to pay their debts as a going concern. Some other factors:

1.) The market is moving to more historical credit spread levels. For some reason the market did not learn it's lesson from 2000-2002.

[/ QUOTE ]

markets never learn their lessons. i cite the entire market history of the world.

[ QUOTE ]
The credit spreads were ridiculously tight the last couple of years.

[/ QUOTE ]

yup. in that scenario, being short credit spreads is great because they can't go negative.

[ QUOTE ]
I had been practically begging people to get rid of their off-rated bonds for app. 6 months. Some of the selling is normal repricing, the results of credit spreads widening. (If you need a more detailed explanation by all means say so)

2.) Baby and Bath water- Obviously you are seeing a "flight to stupidity" in this market. Many area's of the market that should be immune to the subprime mess are selling off (Muni's for example).

[/ QUOTE ]

yup, makes sense. finding good credits can be a great bet here. i made a post about that a bit ago re: goldman & lehman's corporate credits. didn't think about munis.

[ QUOTE ]


Last week Credit default swaps for Financial bonds (Goldman, Bear Stearns, Lehman etc. etc.) were trading as if the bonds were junk levels . Basically C.D.S.'s are swaps/pledges/contracts protecting the bond holder in the event of default. The reason I am mentioning this plays into your Countrywide position. Countrywide provided your analysis is correct will appreciate if/when the market reprices the risk associated to this company and/or the financials firm up in pricing.

Those are just a couple of things........

Also I wanted to say be careful with expecting Fed funds easing to immediately have an effect on your bonds. The fed funds rate or overnight rate has nothing to do with long term benchmark rates.

[/ QUOTE ]

...yea, and you'd expect CDS prices to not treat firms like GS and LB like junk.

[ QUOTE ]


You would expect the rates to go down obviously but in the environment we are in now that may not be the case.

[/ QUOTE ]

yup, can't be too sure of anything.

[ QUOTE ]


An example: For a longtime we have had a flat to partially inverted yield curve. A Fed easing can certainly steepen the curve and make it more normal. However that would preclude long term rates from moving in concert.

[/ QUOTE ]

right, but a fed easiing could influence the market's perception of the ability of countrywide to secure financing to survive long enough to get into solid shape. the long end of a yeild curve not reacting to a fall in fed funds rate isn't exactly analagous imo.

further, if rates move down on sept. 18th i don't think the 10yr will move too much (since it is pretty much priced in and not too much more relative demand will likely pile into it). but if they don't, they'll move up a bit as those expecting the cut move out (not exactly rational but imo that will be what likelyhappens. the curve will shift up by a bit and come back from the steepness it is at right now if fed doesn't ease).

[ QUOTE ]


Another example: (I am going from memory here and may be a little off, unlike Dcifr I most certainly do not have a photographic memory).


[/ QUOTE ]

i deifinatelyhave far from a good memory

[ QUOTE ]

In June of 04' when the fed started tightening (raising) short term rates were 1.25% till June of 06 when they were 5.25. In that time long term rates changed hardly at all. So the short rates moved 400 basis points and the long term market moved maybe 50 basis points if at all.

[/ QUOTE ]

right, b/c of a few reasons that may not be pertinent in a panic like this. first off, the ability of fed to fight inflation was priced in. the curve flattened.

meanwhile, long rates were held artificially low by larger and larger investments (some 800bil) by asian and commodity exporting countries.

[ QUOTE ]
Just a few examples of Fed funds rate cycles not really effecting the benchmarks much.

[/ QUOTE ]

that is true, fed funds rate may not affect benchmarks (i.e. 10yr i think that may be what you mean by "benchmark") much in those times, but these may be different.

[ QUOTE ]


Anyway just food for thought. There is a lot of Jargon in my response sorry for that.


Edit: I just saw that you work on the CME so you probably knew what I posted already....

Further edit: Sorry Dcifr already touched upon CDS, I did not read his post prior to posting mine. Sorry for that.

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no doubt.

Barron

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Barron,

Great response,

It is late and I have to be get up for work in 4 hours so I am taking the easy way out with the one massive quote.

I just kept my explanations simple. There are a myriad of reasons for some of them....... for example why benchmark rates (you can use either the 10yr. or 30yr treasury although the 10 is standard now) did not change much from 04-06 while short rates moved significantly.

Of course in 2000 when the fed was jacking up rates the long bond (30 yr was benchmark at the time) moved over 200 basis points.

I think the relative quickness of the fed tightening has something to do with this. Greenspan and company moved a lot quicker in 2000 vs. 04'-06 which were a series of 25 beep hikes. We could write a thesis here and many people have.

Right now this "flight to stupidity" has caused a selloff in the following:

1.)TOB bonds because of the unwinding of certain muni/corporate carry trades.

2.) Muni's- With the exception of certain housing/corporate backed bonds this market should have 0 corrolation to the sub-prime market. This is the first time I have ever seen muni's "decouple" with treasury yields and significantly I might add.

3.) Corporates bonds/preferreds- We mentioned this earlier.

here is a good example..... Citigroup put out Preferred shares that paid the buyer 7.5% interest on AA/AA2 rated credits. (this is total memory I did not trade these). Two months ago the same credit put out preferreds in the 6.375 to 6.5% area. Treasury rates were 30-50 basis points higher (depending on the day) in June then they are today.

Yes Citigroup and Goldman are not going under. I think it is a great idea to buy CDS swaps on these company's. Bear Stearns is a great example. You can buy their CDS at ridiculous levels and at worst they will be taken over by a company with stronger financials. It is crazy what is happening here.

The one caveat is that it could get a lot worse before it gets better. However, it will get better. I know for a fact that smarter/wealthier people, than I, are starting to dip their toe in.

Personally, we are not out of the woods yet. I think certain Hedge funds that are yet to mark their holdings to the market will more than likely become insolvent. In other words it will get worse before it gets better. There is just a complete buyers strike in certain parts( ie. pretty much anything other than treasury's) of the debt markets. Bids are consistently getting lowered to find buyers.

Till tomorrow........

[CrushinFelt]

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nvm [img]/images/graemlins/grin.gif[/img]

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i missed this post...can you trade CDSs?

if not, what exactly are your restrictions? can you only take full principle investments? what are you working with?

thanks,
Barron

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Yes I am able to trade credit default swaps. That post was asking about something to which I found the answer about 1 minute after posting.

[CrushinFelt]

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right, but a fed easiing could influence the market's perception of the ability of countrywide to secure financing to survive long enough to get into solid shape.

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this is more of what I was getting at rather than playing on actual shifts in the curve