Monday, October 18, 2021

Flipping Bonds… Or Burgers?

The following is an excerpt nefariously purloined from the daily digital diary of Bubba Bondaddy, a bond trader at one of  Wall Street’s major bond dealers.

Tuesday Oct. 12, 2021

Woke up early and anxious.  A new 3 year Treasury note is being auctioned today, and I really, really don't want to buy any. To be honest, I don't even wanna bid!

Inflation is picking up and the Fed is gonna have to start tapering its  QE and raising interest rates soon. Yeah, Powell keeps saying inflation is transitory but, man, it sure feels mighty sticky lately.

I mean, jeez, natural gas prices in Europe are zooming, coal in China is zooming... who woulda thought that I would give a fig about coal in China, huh? It's a brave new world out there, fershure. And at home, I drive by all those fast food joints begging for people to flip burgers at $15/hr…it ain’t natural, man.


Anyway, I am obliged to bid because I work at Smith Harris Smythe & Co. who is a primary dealer. When you gotta bid, you gotta bid....

...... Well, I did bid and got a bunch of the 3 year paper at 0.635%. Boy, was I surprised  because the 3 year traded at 0.560% yesterday, so I bid low on purpose (NB meaning at a higher yield)  - and I still got filled 7.5 basis points higher! Damn, they must have scraped the bottom of the barrel to get this baby sold. Oh well, it's only a 3 year, how bad can it get? 

Seriously, though, I don't feel good about holding all this paper on my book.

Wednesday Oct. 13, 2021

Dammit, wouldn't you know it? Inflation numbers came in today, worse than expected. Headline CPI at 5.4% year over year - last month it was at 5.3%. The coneheads in analysis were calling for 5.3% again - but you know how they play the game... They call for a "safe" number expecting  the actual will come in better and thus "beat" the expectation to produce a rally.  Well, duh, it came in worse! 

So now what? The 3 year immediately jumped to 0.684% following the bad inflation numbers, meaning I get hit with a mark to market loss of  14 ticks on the price (NB from 100.00 to 99.86) -  in just one effing day!!

If there is one thing I hate most of all is to buy into an auction on Tuesday and start losing money on Wednesday!! In just 24 hours I'm losing in mark to market what I will earn in interest in almost three months! 

Monday, Oct. 18, 2021

I’m getting killed this morning. The 3 year is at 0.760%, almost 13 basis points higher. I’m losing  40 ticks in price on my  mark to market - in less than a week. On a friggin’ 3 year!!


Three Year Treasury Note Yield

The way this is going my bonus is gonna be toast this year and I might as well start flipping burgers… aaaarghhhh.

 

12 comments:

  1. Man, that is some beautiful writing... are all bond traders such good writers?

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  2. btw, if we did not want to bid, could he not just have bid such an irrationally high price that no one would ever fill his order?

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    1. *Bid at a low price Akoc, price moves inversely to yield in bonds. Or rather, he would've had to bid at a higher yield (lower price).

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    2. okie... yes; irrationally low price.. =)

      but still, why did he not do so?

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    3. Good question... Maybe market makers are obliged to bid at realistic levels at the moment of bidding? I'm sure Hells knows the answer...

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    4. Primary dealers are the only ones who can deal with the Fed. They are evaluated regularly and they can lose their status as primary dealers. They have to play ball…

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    5. ah... like sightholders with de beers... thanks Hell... =)

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    6. btw Hell, the relationship may help explain the repo? fed needs to keep primary dealers happy as well...

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    7. If you mean the reverse repo, it is now used mainly by money market funds. Because of high demand, the Fed recently raised the number of funds allowed to use it and the maximum amount per participant. As short term rates increase (eg Tbills) however, I expect the reverse repo will be used less.

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    8. which I translate to mean... primary dealers and money market funds may be in the same organization but are not the same person. This makes it difficult to keep a primary dealer happy by keeping a money market fund manager happy...

      I still think the Fed will get cold feet when it sees the effects of higher interest rates... But I really hope you are right....

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    9. The Fed is really in a tight spot. Probably the tightest in its history, given the confluence of very high government debt, huge budget deficits, near zero interest rates, a market bubble and a socio-economy torn between the uber rich and the working poor living mouth to mouth. It's a toxic mix the likes I have never seen.

      Explains the extreme caution with which they are approaching the QE taper timing and the constant, propaganda like, "inflation is transient" meme.

      Mind you, not all Fad governors buy into this meme. I hear the Atlanta Fed has a jar at its offices where anyone who says "transient" must deposit a $1 every time they say it... :) Gotta love the guys there...

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