With GC-Repo Carry Over And FX Carry In Doubt, Are Traders Forced To Ride The Curve For Trade Funding (Butterfly Spread)

Tyler Durden's picture

Following ongoing disruptions in FX funding trades (and following last month's JPY fiasco we doubt anyone will bet all of the "Other People's Money" on this previously sure-thing trade), and the ongoing devastation in the GC-IOER (repo-reserve), which today printed at a whopping 2 bps (a 100% surge from yesterday!), a new carry trade appears to have emerged, one which was all the rage about this time last year again: the 2s10s30s butterfly. As the second chart shows, the R2 between the butterfly and ES is now back to almost 1.000. In other words, the stock market now appears to be correlating very closely to the relative underperformance of the 10 year compared to the 2 and 30 Year tails. With today's 10 Year auction imminent which will likely see a sell off into the auction of that specific spot, following a reversion post the auction, we may see an inverse move in stocks pre and post 1 pm event.

Repo carry continues to be dead:

And 2s10s30s:

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dow2000's picture

Impeach the nigga

fbrothers's picture

Like "Blazing Saddles". Or I will shoot.

Roy Bush's picture

As a lay-person, I need a quick translation of this article...help!

2s5s10s30s's picture

if you need futher explanation on the 2s10s30s then here...

as risk assets rally, the belly of the curve, approx 5 yrs of duration (10 yr being the being the benchmark often leads the way/ and or matches the 5yr part of the curve) is the weakest compared to 2s and 30 yrs of duration. Curve traders being long 2s10s30s are long 2s, short 10s, and long 30's and vice versa if short. If spoos rally and traders are long 2s10s30s, the belly or in this case the 10yr part of the butterfly underperforms and makes the fly rally. opposite holds true. If the fed embarks on a tightening cycle this relationship can weaken or may not hold true.

slewie the pi-rat's picture

yep.  slewie's butterfly, here, would be long 2 of the beat-down 10's and short i each of the wings, the 2's & 3o's, in true butterfly ratio!   why?  i'd get paid for just building the beast, and altho it ain't fool-proof against this mob, it's not too shabby, either!

i think.  not sure, having never traded futures or futures options.

i built a few of these puppies in stock options, tho, back in my salad days, aross time, for a given stock and strike, most frequently in lo-beta puts, no less.  but they're a ton 0' fun, especially if ya can capture that front contract premium.  then, depending on the time/price ratios, well, just freakin wheeee!, basically.

pendragon's picture

that reminds me...where is nic lenoir??

anynonmous's picture

GE faked out,  beautiful


GE to return $3.2 billion to US Treasury

Associated Press


Facing criticism over the amount of taxes it pays, General Electric announced it will repay its entire $3.2 billion tax refund to the US Treasury on April 18.

GE uses a series of foreign tax havens that the company says are legal and that led to an enormous refund for the 2010 tax year.

The company earned $11 billion in 2010 on revenue of $150 billion.

The company, based in Fairfield, Conn., plans to phase out tax havens over 5 years and said it will create one job in the US for each new job it creates overseas.



GE Says Report on Returning $3.2 Billion to Treasury a Hoax

“It is a hoax,” said Anne Eisele, a GE spokeswoman. The statement, which purported to be from GE Communications, claimed the Fairfield, Connecticut-based company was responding to a “public outcry” and would “allow the public to decide how to spend” the returned money.

General Electric Co. Chief Executive Officer Jeffrey Immelt has said he’s happy to defend the company’s (ZERO) tax rate.


Arius's picture

confused....which one is it ?

RobotTrader's picture

Yep, and as the market sells off, gold stocks are always hit the hardest, while cult stocks like LULU and BIDU grind up  higher.

I just wonder when it is going to sink into the gold-clutching gloomers heads that cheering for an economic collapse and a stock market crash is akin to cheering for your own demise.

Why aren't the gold bugs cheering for Dow 15,000?

atlee's picture

Why do you not understand that?

Muir's picture


No they do not understand, because a lot of posters here are completely illiterate in basic economics.

Then a brilliant poster like Cheeky is drowned out.

lieutenantjohnchard's picture

or it might be that some posters have 30 years experience on wall street, and can see right through a fraud.

Muir's picture


I sold the house I lived in 05 and rented.

In Nov-Dec 08 I looked at FRED2 and saw what the FED was up to and got kicked out of two forums for saying that I thought the FED would win, deflation stop and inflation and risk appetite kick in. (one forum is Housing Bubble blog - same profile name)


The above speaks for itself.

That is unlike many here who buy silver / gold and are totally clueless as to when this makes sense and when it does not. -


Robot Traders Mom's picture

I'm going to give you a nickel's worth of free advice Robot: eat lunch near the principals office so the older kids don't pick on you and take your food.

Twindrives's picture

As usual RoboTrader is suffering from lack of attention so must spout off to compensate.  Grow up dood. 

Internet Tough Guy's picture

You are so boring with your lame 'rasputin' imitation. lulz.

Cole Younger's picture

What would dow 15,000 prove? In the end, the U.S. defaults on its debt regardless of where the DOW is.

LowProfile's picture

We don't want to pay the capital gains to exchange gold for stocks at DOW:GOLD 1:1 at DOW 15k, we'd rather do it at 2500:2500 (or less!).


lieutenantjohnchard's picture

poor catfish mouth. he's having to resort to more and more posts to take his mind off his losing positions. he's already going dutch on his dates. next he'll be scaling down from green sprouts to lentils. then he'll be looking for old lulu clothes at goodwill stores.

yep, he's still projecting his gloom onto we merry band of gold and silver holders.

bonddaddy's picture

With all due respect , you got it ass backward .   The carry trade means buying something like Fannie Mae MBS and funding it in the repo marketplace . With repo rates plunging , those long a bond can fund it at lowest rates in all history . One can borrow against a Fannie Mae or Freddie Mac mbs bond for 90 days at less than 0.20% today alone ...... previous low had been around 0.30% back when 2yr note was around 0.35% . 

The only people getting screwed now are the poor slobs with cash in Money market accounts where they are getting paid under 0.05% for 30-60-90 day repo .....


This plunge in carry trade is a BOON to carry traders .... why else do you think Bill Gross is rushing out to take a new mortgage REIT public that will do nothing but buy GSE mbs bonds ( probably lever it up 6 or 7 x 1 ) and fund it all in repo market place ? Surely you saw the new release on this .

flustercuck's picture

the above makes the most sense to me.... can someone chime in if its incorrect? people with risk assets to fund are doing so for basically nothing, and the ones trying to get a return on their cash are getting screwed

ZeroPower's picture

'With all due respect', there are many types of carry trade. 

Fannie MBS = win

cjc1023's picture

i have been following zh's recent posts re gc-ioer carry but i think i'm missing something.  from what i've been able to decipher, the gc-ioer trade goes: borrow via gc and park at fed, earning the spread.  so someone please explain to me how it is bad for this grade if the gc rate keeps plunging?  wouldn't that mean you'd be able to borrow for less...increasing the spread???  i know i'm missing something really obvious but i'm not nearly as well versed as most of you guys so gimme a quick explanation please...

GittyUP's picture

I think your confusing the GC rate with the GC-IOER spread.   Borrow (pay) GC rate and lend (collect) IOER.  the difference is in the spread.  The spread is now 2bps so basically risk free carry is over. 


In response to bondaddy the GC rate hasn't really changed so its still possible to borrow at GC rate and buy MBS's or similar and make the spread.  I dont think this would classify as carry trade though....

bonddaddy's picture

<<  In response to bondaddy the GC rate hasn't really changed so its still possible to borrow at GC rate and buy MBS's or similar and make the spread.  I dont think this would classify as carry trade though....   >>


dude ..... when 90 day GC borrowing drops from 0.30% to 0.15% , that is MEANINGFUL .  When you buy assets yielding 2-3% on leverage and fund it all 15bps lower , you just cranked your total return a bunch .


stop and think how many forms of speculation require cheap borrowed money ?  when GC rates drop to next to nada ( 90 day borrowing against UST hit 0.01% yesterday ! ) , you have the cheapest money imaginable for the carry trade !

lets say it all together :  GC repo is the rate you can borrow cash vs posting collateral such as UST , GSE mbs , gold , investment grade corps , etc ....... when the rate plunged , cheap cash gets cheaper to go speculate elsewhere . 

flustercuck's picture

again, agree with this. trying to get a better understanding of overall picture... thanks for the explanation.


GC rates actually dipped into negative territory for a short period last week... was wondering if u can explain the logic behind this from cash lender perspective? (ie. why I would pay you to take my cash o/n). Thanks in advance...

mynhair's picture

Excellent call on the action.  TY

bonddaddy's picture

<< GC rates actually dipped into negative territory for a short period last week... was wondering if u can explain the logic behind this from cash lender perspective? (ie. why I would pay you to take my cash o/n). Thanks in advance... >>


i assume you know repo rates plunged starting 4/1 due to provisions in Dodd-Frank that discourage banks borrowing in repo marketplace ( in theory to force them to become less reliant on hot repo money that dries up in crisis )  . Thus the hundreds of billions of GSE mbs , UST and other repo'able assets banks borrowed against daily stopped overnight .


On the other side are the trillions in money market funds , broker sweep accounts , and corporations like AAPL sitting on $50 bill in cash . These cash long guys all put it out in various forms of money markets but the safest bar none is getting real assets sent to you in return for your cash ( ie TBills , UST ,etc )


Thus the banks who have all these assets stopped putting out collateral . The money market funds still had same cash that had to go out via repo . Too much cash vs reduced collateral .


That it went negative was absurd but then again , better to lose 0.01% for a night then let your billion sit at C overnight fully at risk if they blow up ........


In short , losing a bp trumps having your cash unprotected for a day getting zippo .


Muir's picture

Thank you for your comments, I'm still trying to wrap my head around this.

bonddaddy's picture

<<  Thank you for your comments, I'm still trying to wrap my head around this. >>


Trust me , its NOT at all easily understood . I still recall sitting in the MBA training program for fixed income in 1987 at Kidder Peabody trying to comprehend 'repo'vs 'reverse repo' and how one understood who had the cash and who had the collateral , etc,etc,etc  ....... a whole room full of Ivy MBA's including myself sat there with glazed eyes for longer than i care to admit trying to grasp .

Lower repo rates is GREAT for carry trade . Thats why when Fed raises Fed Funds ( raising repo rates by identical amount ) , the carry trade gets destroyed and leveraged plays get wailed on .


Look at a stock like NLY who is nothing but a publicly traded hedge fund in the GSE mbs carry trade . Fed began raising rates last in late 2004 . I had massive NLY position but i bailed hard by YE 2004 . It wasn't until mid 2005 that NLY finally shocked and slashed its dividend due to rising repo rates compressing the carry trade ..... stock went from $20 to $11 in a few months setting up the ultimate re-entry at $12-13 by mid 2006 when Fed finished .


And thats why NLY is paying a 14% dividend yield today and will continue to do so until Fed actually appears like it will raise Fed Funds

slewie the pi-rat's picture

hmmm...all carry trades are spreads.  not all spreads are carry trades.  carry trades can blow up, too.  very far.  very fast. 

yeah.  people have been banking on the full faith & credit of americans and the fannie/freddie and various other fraud-based fiat fiascos. 

just send the money, honey.  and,  if we can keep that debt ceiling going up, the US certainly isn't greece or portugal.  yet. in polite company.  is it? 

people want to get into highly leveraged games around the probabilities and "cheap" financing, go ahead!

i was at a casino just yesterday, playing with a little house chump change.  i got to flirt a little, had a fun time, and won $17.50, too!  worked for me!  carry on!