Diary of a Financier

From the Trading Desk: Trade Reconciliation (Week of September 5)

In Capital Markets, Trading Desk on Sat 10 Sep 2011 at 07:40

In few words, I’m confidently bearish on the short-term now, having “layed low” for the last 48 hours of last week due to my indecision. (I’m proud of my patience.) I tried buying a slug of the US Treasury TIPS* ETF (TIP) Friday afternoon. I opened the order around 2:30pm EST because it’s ripe, technically. Allow me to explain:

Basically, TIP is a bull play on a QE3 followthrough. Unlike equities, which seem destined to fall until a monetary stimulus announcement is imminent, TIP has decided to rally. Under an Operation Twist or something of that sort, remember the Fed will purchase TIPS along with vanilla T-bills/bonds. Like I said, a bull play on QE3, without the volatile equity downside–particularly in the case of a QE3 negation.

I tried for an execution on TIP, buy I didn’t fill at my limit $116.16. Intraday fractals spent much of Friday afternoon overbought, and I’d rather wait to execute at a lower basis at the beginning of next week, when the air pocket below 116.40 is filled:

TIP (30-min)- Overbought MFI with stochastic descending from top of trading range means potential to fall to support at 16.10.

TIP (1-min)- note the technical indicators

Beyond the intraday pullback I expect on Monday, I have to say, TIP is the most bullish looking Treasury issue out there, when most Treasuries are getting so rich that it’s almost uncomfortable to add to positions like my TLT:

TIP (daily)- most bullish Treasury issue out there.

With the 10-year breakeven running around 1.9% (T-bond yield less TIPS yield), investors are expressing their expectation of modest average annual inflation over the next decade. I can attribute that to the deflationary tug of housing on CPI-U; the aforementioned “investors” would appear quite prudent. That explains TIPS’s lagging this T-bond rally. Lest we forget, however, that TIPS are Treasury securities. Their pricetag [should] incorporate a [hefty] premium for the safety of their issuer. TIP has rallied in response to recent CPI upticks, but I must repeat this issue of a “lag” relative to your IEF or TLH. When capital seeks safety in risk-off markets like today’s, TIPS are a worthy bastion. Add to that the QE3 likelihood, and TIPS have substantial upside for reasons most investors wouldn’t consider.

Not much else to report from the Trade Rec, which has been pretty quiet over the past weeks. What can I say; no more new equity positions for some time, I’ve jut added VXX and TLT most recently. Not much else long or short-biased:

  • $ES_F at 1166. Per 30-min, may hit 1170 1st restce overnight, but that’s the top. I’m long $VXX and still short $XLF. looking for more… Sep. 6 at 6:16 PM
  • $BDI worth noting fm 1306 on 8/16 to 1750 today. To put in context, we’re back at 12/2010 levels, but the chart has gone parabolic. Sep. 6 at 5:35 PM
  • Pensions only 83pc funded due to low bond yields and derisking, which has to have influenced record asset correlations. http://stks.co/5kE Sep. 5 at 10:49 PM

–Romeo

*Treasury Inflation Protected Securities (i.e. TIPS)

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