Forecasting the Turn

This wont be a lengthy, in depth piece about the predictive power of charts. In fact, if you ever cared to watch my GtLH segments on BTFDtv you'd know that I can't read a chart to save my life. Now that doesn't stop me from drawing lines everywhere and then shading in the funky areas to make some great geometric designs... However, not a single piece has sold on my Etsy Shop and I've not made one trade off of the colored works. It's probably best that I hang up that skill for one that will be profitable. Rather, this a a flow piece...

Here's just a glimpse of what I see:
There's been a spread buyer in the June / July 1 month calendar spread {ZQMN15} in the Fed Funds for the last 9 weeks. Initially, they began purchasing 1000 at a price of 4.5. After that, they bought roughly 3500 at 4 before moving it all to the 3.5 line and bidding for another 6000. In total, I suspect the buyer is long about 7500-8000 spreads. Roughly the entire open interest in July...

If I was to speculate on the buyer, I'd say it smells of a European player. His playbook always included buying blocks of spreads. The price was attractive too. Even at the top level of 4.5 the buyer was still buying < 29% chance of a rate move. That payout is almost 4:1 and could potentially be more if Yellen comes out with a shock and awe FOMC statement. The spread is currently 4.5 / 5, better bid.

I think its telling where the buying is taking place. For a long time, we've heard that 2015 will be the year we finally fix the ZIRP problem. If that's true and the buyer is right, the mid June 2015 meeting could finally be the tipping point. For the sake of P&L, buying 100 MN15 spreads at 5 and catching a 25 basis point hike, nets you a profit of $45,000. Double that number if Yellen goes 50 bps. Of course, I wont stay in the spread long enough to capture all of that move, but she still seems hell bent on telegraphing the playbook, so maybe she'll tip her hand 6 months early...who knows? I'm long, lezzgo.

Finally, one interesting trade from Friday 3/14. As the trading day was coming to a close all of the Fed Funds were drifting aimlessly higher but the spreads weren't moving. Normally when the outrights trade higher the spreads sell off a bit. Then a buyer stepped in and bought about 1500-2000 spreads on the hard offers. All were executed simultaneously, all mid year 2015 spreads, and none of them were working orders that moved up... they were all new. Now, I realize that volatility was getting bid across the curve and that there was a war premium being built in for the weekend... BUT no trader in their right mind would lift non moving, hard offered spreads as a hedge to a weekend bet on war. Again... just something to keep your eye on.

~LH