Confucius say ...

"He who pick bottom, get stinky finger" (perhaps my favorite 'market timing' quote--obviously not Confucius)

Friday was a very abbreviated session that gave the credit markets a quick and solid beat down. Not only did every interest rate product move lower, but the spreads started moving as well (as opposed to the unilateral moves we've had recently)

To us, this signals a good sign. The marketplace is finally starting to price in a recovering US economy and all of the impending policy maneuvers that will accompany this revival.

Here's a few points of interest:

• As of the close yesterday, the Fed Fund Futures were pricing in a 43% chance of a 50 bps rate move at the January 2011 meeting. (Also known as an 86% chance of a 25 bps hike)
• Our closely watched NOB (Notes over Bonds) yield spread touched 86 bps on Friday. In the full session yesterday (Monday 4.05.10), it did NOT react as we had expected. Recently, when the short end (ED and 2 Yr Notes) sell off, the NOB goes negative (in relative terms, the 10's are underperforming in relationship to the 30's and the spread between their yields is increasing) Yesterday, even with a aggressive sell in the futures market, the NOB stayed constant at 88-89 bps. This signaled to us that the market wasn't fully convinced that yields were headed higher. Early price action today, confirms that assumption as they are drifting higher in early trade.
• General market consensus is that this week's auctions (all 8 of them ranging from 4 weeks to 30 years) will be met with mixed demand. Most talking heads have been harping on higher interest rates due to investors REQUIRING more bang for their buck. We disagree. Foreign investors were quiet at the last few rounds of auctions as they sifted out the mixture of data coming from the US. We anticipate very robust auctions and a drop in current yields (especially in the TY and US contracts).

We got long the following:

1. In the Ten Year (TY) we bought the 116.5 - 117.5 call spread for 8 ticks. Risk is 8 ticks, potential profit is 56 ticks (64-8). We're looking for a good TY auction on Wednesday and will probably be out around 14-16. {SOLD OUT AT 15 vs. 115.30 TYM10 Netting 87.5% profit}
2. In the 30 Yr Bond (US) we're long the 116-117 call spread for 13. Same parameters, just looking for a pop.{SOLD OUT AT 22 vs. 115.21 in USM10 Netting 69% profit}
3. We're still hedged up for a move to the downside in the Euro Dollar (ED). We still have the E0K 9837.5 - 9812.5 put spread 1x2 on for a half a tick. We're long the 9837.5s to be short 2X the 9812.5s. This trade pays off if the June 2011 ED settles below 9837.5 on May14th.
4. We took off the E0J put spread 1x2 for a 75% profit.

Closing thought:

• A large hedge fund in Greenwich CT. initiated a US 117 - 119 call spread 1x2 this morning. They bought the 117 calls and sold 2X 119 calls. They did 15K (15,000 x 30,000)! In my opinion, they have the same thoughts as us. The only difference is the timing (We put all of ours on yesterday) and size (We didn't do 15K)

This is the week of supply.

~LH