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Intraday Cross-Asset Compression Arbitrage Opportunity

Tyler Durden's picture


Two interesting charts indicate that following the earlier S&P announcement, which for the first time saw a risk aversion reaction that resulted in a selloff in equities and bonds, the 10 Year is surprisingly rich to the ES. In fact, a quick look at the chart below shows that while most asset pair (FX, Crude, ES) continue to correlate tightly following the downgrade, the 10 Year point is a major outlier. What is even more curious is that while the 10 Year may be outlying notably, the actual curve itself, as depicted by the 2s10s30s continues to correlate perfectly with ES despite some earlier choppiness. For those so inclined, an appropriate convergence trade would be a 2s10s30s neutral: essentially locking out for parallel curve shifts to moves in the ES, while trading the 10 Year spot for a compression trade with the ES, but keeping the wings of the butterfly constant as both the ES and the 10 Year is bought.  This trade makes even more sense if the Fed proceeds with one of its late MOVE dumps, whereby it sells vol via off-balance sheet SPVs.

Cross asset correlation:



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Mon, 04/18/2011 - 15:01 | Link to Comment RobotTrader
RobotTrader's picture

Now it is down to only a one day plunge in interest rates to re-invigorate the Animal Spirits to get the fund managers to start diving head first back into tech stocks???

The pressure to score the most beautiful Russian escorts at The Hamptons this summer must be unbearable.

Huge amount of performance anxiety.

Mon, 04/18/2011 - 15:10 | Link to Comment redpill
redpill's picture

Which one is your mother?

Mon, 04/18/2011 - 15:18 | Link to Comment tmosley
tmosley's picture

One of the parasites in the water.

Mon, 04/18/2011 - 16:26 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

thanks, RT!  i've always been partial to the wildebeest.  mother-in-law, probably...

Mon, 04/18/2011 - 15:47 | Link to Comment Ima anal sphincter
Ima anal sphincter's picture

Now THAT made my day.

Mon, 04/18/2011 - 17:37 | Link to Comment rocker
rocker's picture

Not mine. Robo needs to inflate the boobs. New chick is flat chested.

If you want us to inflate stocks again, start with the boobs. Bring back busty or something top heavy.


Mon, 04/18/2011 - 15:12 | Link to Comment Bubbles...bubbl...
Bubbles...bubbles everywhere's picture

I junked you because only a loser feels any pressure to score a Russian escort.

Mon, 04/18/2011 - 16:07 | Link to Comment Missing_Link
Missing_Link's picture

I junked you for failing to detect irony.

Mon, 04/18/2011 - 15:23 | Link to Comment lieutenantjohnchard
lieutenantjohnchard's picture

still dreaming like walty mitty that you're a player. guess you'll have to live vicariously through the lives of those in the hampton's that you so envy.

meanwhile, as you would bray, for real performance anxiety look at your own widows and orphans portfolio, then gander at gold and silver which you so desperately hoped would drop more than 1% this morning.

btw: gentleman jim sinclair sends warm regards, and condolences for your ever shrinking seed capital as the walls creep ever closer in your 600 square feet apartment.

Mon, 04/18/2011 - 15:35 | Link to Comment SheepDog-One
SheepDog-One's picture

Robo is the one out front jumping right into the croc's mouth yelling 'retail stock can not be stopped'!

Mon, 04/18/2011 - 15:04 | Link to Comment Sophist Economicus
Sophist Economicus's picture

OK, I don't know whether to get this "opportunity" translated by a financial analyst or a lepidopterist....

Mon, 04/18/2011 - 15:07 | Link to Comment redpill
redpill's picture

Occasionally on zerohedge they have articles of lingo-laden technicality to the point that I'm pretty sure I have no fucking idea what they are talking about.

This is one of those times!

Mon, 04/18/2011 - 15:26 | Link to Comment mynhair
mynhair's picture

When in doubt, just fake it.

Mon, 04/18/2011 - 15:37 | Link to Comment redpill
redpill's picture

Oh, right.. ahem...


BTFD bitches!

Mon, 04/18/2011 - 15:09 | Link to Comment NOTW777
NOTW777's picture

yes we have the wisdom of steve finally - deficit cutting may be too much. and mr. isanea

confirming we should go slow on stopping the spending orgy

Mon, 04/18/2011 - 15:07 | Link to Comment plocequ1
plocequ1's picture

Cross Asset compression arbitrage. I like the way that sounds. I roll it on my tongue like poetry from Lord Byron.  Translated.. BTFD

Mon, 04/18/2011 - 15:08 | Link to Comment rubearish10
rubearish10's picture

Tips and views only a HF manager could appreciate. IT is still enjoyable to and sometimes profitable to work on the periphery. Great work as always Tyler, Mr T.D.!

Mon, 04/18/2011 - 15:15 | Link to Comment NOTW777
NOTW777's picture

wheat ripping

Mon, 04/18/2011 - 15:17 | Link to Comment TooBearish
TooBearish's picture

Bens preffered wya for u to lookit this "arb" is to buy shite outta Spoos...BTFD and then by more

Mon, 04/18/2011 - 15:15 | Link to Comment TideFighter
TideFighter's picture

I junked Robot because, I, um, am just following the herd.

Mon, 04/18/2011 - 15:18 | Link to Comment Jasper M
Jasper M's picture

10-year is only "surprisingly rich" to the ES IF you embrace your unspoken assumptions.

IF, on the other hands, matters Euro are seen to be going south faster than the $US, the later currency will return, if only for the year, to safe haven status, and Treasuries in general could be expected to rise. 

Not what the herd wants to believe just now. WHich is one of the resaon I am preparing for it. 

Paging Tyler: You, or rather, your site, got a mention at the Socionomics Summit in Atlanta. 

Mon, 04/18/2011 - 21:00 | Link to Comment oblom
oblom's picture

Jasper, thanks for getting it. Another reason why this "compression" may not happen is liquidity removal that's about to commence (or at least perception of such). 10-year yields were going higher during QE2 because of the inflation fears. Now that QE2 is ending, deflationary concerns will be back on the table.

Whether the Fed continues to "support" the market or not, is somewhat irrelevant. They are going out of their way to signal that liquidity will be pulled back, and that's enough for a few months worth of 10-year rallying.


Mon, 04/18/2011 - 15:19 | Link to Comment RobotTrader
RobotTrader's picture

AAPL ripping to the upside.

Now green.

When do those guys report???  Heh, somebody is frontrunning another blowout quarter.

Mon, 04/18/2011 - 15:29 | Link to Comment lieutenantjohnchard
lieutenantjohnchard's picture

keep posting. it'll take your mind off your own poor investing performance.

btw: how's that jpm trade working? what's it down, 10% since you bought it? russian hookers? more like shrinkage for you little guy.

Mon, 04/18/2011 - 15:49 | Link to Comment SheepDog-One
SheepDog-One's picture

Load up on it then bigmouth! However be careful, as 1 Apple share=1 month of your $10 a day food budget!

Mon, 04/18/2011 - 15:25 | Link to Comment disabledvet
disabledvet's picture

is it a buying opportunity?  or is it "have i got a bridge to sell you in New York" ala Bernie Madoff?  We've all been told "it only has to do with confidence." Well "is that all it is?  A Confidence Game?"  Or is it as Alan Greenspan said "how is one to know when an IRRATIONAL EXUBERANCE has taken hold?"  I'm told "i'm suppose to care" vis a vis such exuberance...that the "housing bubble was all Alan Greenspan's fault."  Really?  Well if i can't understand even MORAL failings let alone finance one's then should i be concerned about bailouts?  how about inflation or "the failure of the Federal Government to agree on a budget"?  Why do I keep hearing a voice in my head saying "character ALWAYS counts" whatever else be said?

Mon, 04/18/2011 - 15:27 | Link to Comment AboutAverage
AboutAverage's picture

Didn't they close down a bunch of online poker games recently?   I wonder if the payouts for the online games were actually better than the stock market... lol... gotta close down competition.   Watch out Vegas and Atlantic City, you will be next.  

Mon, 04/18/2011 - 15:38 | Link to Comment TooBearish
TooBearish's picture

Hardly, Vegas and AC pay taxes  - on-line poker not so much...QED

Mon, 04/18/2011 - 15:29 | Link to Comment Frank N. Beans
Frank N. Beans's picture

here's the arbitrage rule I go by:

The angle of the dangle is inversely proportional to the heat of the meat.

Mon, 04/18/2011 - 15:28 | Link to Comment Dejean Splicer
Dejean Splicer's picture

Buy the drip.

Mon, 04/18/2011 - 15:34 | Link to Comment chancee
chancee's picture

As usual, massive, massive BUY volume come in on SPY to prop the entire market up.  The volume in all the other S & P stocks that supposedly make up SPY have a fraction of the volume... but of course get dragged higher.

Mon, 04/18/2011 - 15:33 | Link to Comment Eric Cartman
Eric Cartman's picture

I read it, then I read it again and yet I have no idea what I just read... 

Mon, 04/18/2011 - 15:40 | Link to Comment mynhair
mynhair's picture

Just BTFD.  All a head fake sos's the big boyz could steal cheap USTs to sell to Berskanky.

Mon, 04/18/2011 - 20:13 | Link to Comment DeadFred
DeadFred's picture

Problem with a spread like this is you have to identify what the dip is.  Beyond my paygrade but any explanation of how to ID the high and low part of the spread and what to do would be informative.  It would save doing the work myself which is attractive to those of us who are "motivationally challenged".

Mon, 04/18/2011 - 16:02 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

ok, tyler, as long as we keep the wings of the butterfly, i'll sell a spot 10 for the compression trade for the ES.  why?, i have no idea, since the risk is about 50X the butterfly, even tho this, too, will put some FRNs in the trading acct, to open.

suicide for $1000, please, alex.

Mon, 04/18/2011 - 17:03 | Link to Comment Phillips Capital
Phillips Capital's picture

Words. Big. Me learn one day.  

Tue, 04/19/2011 - 00:49 | Link to Comment Grand Supercycle
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