Friday
Jul282006
GDP Report Rallies Bonds but Ignores Inflation; Short and Hurting
July 28, 2006 at 11:19 AM
The Report:
The GDP report is making trader worry that the economy is finally slowing.* They've pushed the yield on the ten year US treasury is back under 5%. By focusing on the slowing economy and not on future inflation, traders are missing the other part of the data. As is typical, traders are being a bit myopic. The GDP deflator (another measure of inflation) was at a 12 year high of 2.9% (excluding food and energy) and a whopping 4.1% overall. See full government reports here.
My Position:
I went back to my maximum short (bet that rates would rise) when rates hit 5.05%. What do I do now that the yield is 4.99%? I thought of buying back my futures and cutting my losses - but that is what everyone else is doing. Also, I really wish I could sell more here, but to do that would violate my rules on size in any one bet. Instead, I bought out of the money call options. Bond volatilities (and thus options) seem cheap relative to the uncertainty in the bond market. This puts me in a position where I will have continued losses if bond prices go higher (yields get into the mid 4.5% range) but the loss will not be catestrophic. I made enough playing the 5.00% - 5.2% range on the ten year bond this year that I'm happy to pay away a little money. Now I can keep my short and don't have to worry about stopping myself out.
Commentary on Bond Market and GDP Report
Market Watch on GDP report
Seeking Alpha Network summary from Wall Street Journal Alerts
*okay this link is to USA Today. I'm embarrased to promote the "McPaper" but this article does offer a simple easy to read explanation of today's GDP report. I also like that it focuses on the pickup in inflation. I think inflation is still out there.
I am short futures on ten year treasuries and thirty year treasuries. I also have many options positions on those futures. I actively trade my bond positions.
The GDP report is making trader worry that the economy is finally slowing.* They've pushed the yield on the ten year US treasury is back under 5%. By focusing on the slowing economy and not on future inflation, traders are missing the other part of the data. As is typical, traders are being a bit myopic. The GDP deflator (another measure of inflation) was at a 12 year high of 2.9% (excluding food and energy) and a whopping 4.1% overall. See full government reports here.
My Position:
I went back to my maximum short (bet that rates would rise) when rates hit 5.05%. What do I do now that the yield is 4.99%? I thought of buying back my futures and cutting my losses - but that is what everyone else is doing. Also, I really wish I could sell more here, but to do that would violate my rules on size in any one bet. Instead, I bought out of the money call options. Bond volatilities (and thus options) seem cheap relative to the uncertainty in the bond market. This puts me in a position where I will have continued losses if bond prices go higher (yields get into the mid 4.5% range) but the loss will not be catestrophic. I made enough playing the 5.00% - 5.2% range on the ten year bond this year that I'm happy to pay away a little money. Now I can keep my short and don't have to worry about stopping myself out.
Commentary on Bond Market and GDP Report
Market Watch on GDP report
Seeking Alpha Network summary from Wall Street Journal Alerts
*okay this link is to USA Today. I'm embarrased to promote the "McPaper" but this article does offer a simple easy to read explanation of today's GDP report. I also like that it focuses on the pickup in inflation. I think inflation is still out there.
I am short futures on ten year treasuries and thirty year treasuries. I also have many options positions on those futures. I actively trade my bond positions.
Disclaimer:
Nothing in this blog is meant to be specific financial advice or a recommendation to buy or sell. I do not give investment advice. Do your own research. Do not rely on anything in this weblog to make investment decisions. I do not log all my trades here. I only describe or mention those that I think might be interesting. Consult an investment professional familiar with your specific financial situation before buying or selling any security.
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