A Classic Stop And Squeeze: The Fed-PD-Fed Free Money Arbitrage
From Nic Lenoir of ICAP
A classic stop and squeeze...
Well at least the only trade left in town is working! In a classic old school alley-oop clinic that could make us forget Magic to Kareem, the Fed to dealers to Fed (remember the Fed runs the auctions) switcharoo was in full force today. Add to that the fact we have a mid-week bond holiday before the start of QE 2.0 on Friday, and really the set-up was perfect. A nice tail at the auction stopped out the day traders and the weak longs into the hands of the dealers who turned around and bought, even more so in the 5y to 10Y sector, so they can deliver to the Fed on Friday. We happily tried to help our clients collect on the round trip as this kind of day is clearly a sign of what's to come in the Fixed Income space.
The Fed can claim all it wants it is making money on its portfolio, when the Treasury sells 30Y bonds at 92-16 and they settle at 93-24 before the Fed starts buying (Fed buys shorter maturities which actually outperformed the bond on the rally), the government is not really making money on that trade. Today was a nice $170mm handout to the market. Hopefully that money is spent and leveraged into millions of subprime mortgage loans that revive the housing market... NOT!
Good luck trading,