US Treasuries vs Stocks - One Of These Things Does Not Look Like The Other...

govttrader's picture

    Today saw a massive short covering trade occur in the US Treasury market.  A broad base of traders got short treasuries over the past few days (long end auction setup trades...and the usual group who just MUST fade every move).  Yesterdays weak ADP and ISM data brought in a large buyer of bonds (and a medium size seller of stocks).  Today the stocks market went sideways while the Treasury market was rocked...the herd of Treasury shorts was caught and fear overtook all rational thought.  There was a very high volume short covering event in the morning that lasted for about an hour and saw 100mm/basis point trade in a straight line "up"  (this is 4x normal volume for that time period).  While all this craziness was taking place in the Treasury market...the stock market was "unch."  Its as though stock market participants were completely unaware of what was happening in the Treasury market.

    3 weeks ago (March 14th), S&P futures opened 1554 while 10yr Treasuty futures opened @ 130-10.  Today, S&P futures closed @ 1555 "unch from 3 weeks ago" while 10yr treasury futures closed @ 132-26  (thats 2 1/2 POINTS on a 7yr piece of paper). 

 3 weeks ago the relationship between stocks and bonds was priced at fair value.  Today, the stock market hasn't moved and the Treasury market has been ROCKED.  On a relative value basis, the Treasury market is now 20 basis points rich compared to the stock market.  To put that in S&P terms...the S&P is currently trading 1555....if the S&P were to move to accommodate the move in the Treasury market...the S&P would need to trade 1450...that's 100 POINTS lower (or 6.4%).  This is the most rich these markets have been relative to each other in years.  The current correlation regime has lasted 9 months  (treasuries and stocks have been dancing with each other in a stable fashion for the past 9 months).  Even adjusting for regime change, this move today is the richest these markets have been even during this current 9 month regime.

    So, either the regime between bonds and stocks has just changed...or the market has just given traders with cash on the sidelines a gift.  History has taught us that regime changes don't happen very often...and the smart move for a trader has been to fade these attempts to "break the regime."  Its true that someday the regime will shift, and we will enter a new regime, and fading a move like this will lose money.  Do you think that just happened?  Do you really think we just entered a new regime?  Its true that Japan just embarked on a new round of QE...and it is a 2.5 times the size of current US QE, and North Korea is threatening war.   Should that break the regime of the relationship between US stocks and US bonds?  Someday, something will do just that.  The question for traders you think the regime just shifted.

    Personally, I'm not convinced, and so i faded this move at the close by selling ES and ZN  (S&P futures and 10yr Treasury futures) at a ratio of 4 ES vs 11 ZN contracts.  If you are trading a 1mm$ account and wanted to put 1/3 of your margin to work on this leveraged trade, then you would sell 40 ES @ 1555 and sell 110 ZN @ 132-26 (thats 317k of 1/3 of your futures account as an example).  The trade to fade this move is to sell both (sell ZN and Sell ES), which is exactly what I've done.

Follow @govttrader on twitter to see what happens with NFP and next weeks long end (10yr and 30yr) treasury auctions.  Did the regime just change...or did the mkt just provide me a gift?   My expected timeframe for this trade is 1-2 weeks.  As always, my expectation for the future will determine when i actually exit this trade.

Disclosure:  I am not advising anybody do this trade with me...this is a leveraged trade, and short positions have the theoretical potential for unlimited losses.

govttrader out...

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Grin Bagel's picture

Thanx Fellows; it's good to read trades talk again, that's what originally drew me to ZH. And I have never been sorry....well except when an odd couple get into a ego pissing match, but we all have learning curves.

My wallet's in metals these days, after paying lotsa dues for trying to pic tops &/or bottoms for too long, but my heart's still in trading, and has been for almost 50 years.

My best wishes for all ZH'rs

NeoLuddite's picture

It's only unnatural if it cant'be done.

SAT 800's picture

Went back into the EUR/USD short trade this time in Sept. @1.3049. I hope this market is still in control of the Bears; it should be; but I guess I'll have to wait and find out.

MrBoompi's picture

It seems only experts understand these moves in the bond markets.  For regular folks, it's really hard or even impossible.  I appreciate the opportunity to learn something.  But I would like to make a comment about North Korea.  What they have actually threatened to do is defend themselves, something every soveriegn nation has the right to do.

Schmuck Raker's picture

Whether your point is correct, "What they have actually threatened to do is defend themselves...", it may be worth keeping in mind the Koreas are STILL technically AT WAR, having never declared more than a 'cease fire'. (IIRC)

Trampy's picture

"Markets can stay irrational longer than you can remain solvent."

This trade is exactly shorting YHOO and AOL in 1999 before they doubled and then tripled.  I know because I did exactly that, but I had stops in place.

Old fable from Chicago pits goes something like this.  One pit trader tells another that God came to him this morning told him that corn would go to the moon today after the open, and he's putting everything he has into it.  Other trader was interested but skeptical, and asked: Hmm, did He tell you where to put your stop?

For those who don't understand trading, the massive UNHEDGED selling of both stocks and bonds at their presumed tops where prices are in uncharted "free space" at new highs is a totally idiotic idea for a "trade."

Don't let the "suggested" large trade size fool you into thinking this is "smart money."  The only sure thing about it is that it's a sure way to blow up a trading account.

govttrader's picture

Old fable from Chicago pits goes something like this.  One pit trader
tells another that God came to him this morning told him that corn would
go to the moon today after the open, and he's putting everything he has
into it.  Other trader was interested but skeptical, and asked: Hmm,
did He tell you where to put your stop?


this made me laugh...thanks

govttrader's picture

you should really follow me on twitter...  @govttrader

SAT 800's picture

How insulting. Personally, I don't "follow" anyone, anywhere. Post audited copies of your complete trading records for the last three years, and I'll take a look at it. What do you get out of this absurd, "following"?

govttrader's picture

What does a journalist get out of people reading their news stories?  Why do you read zerohedge??

Trampy's picture

I'm new here.  Is it really true that there's no Ignore (aka Bozo) button?

SAT 800's picture

Basically, this argument boils down to; it happened for awhile, so it will always happen. Driving by looking in the rear view mirror. I can't get interested in these so called correlations. I'm old; I've seen a lot of new normals. In 1987 during black Monday, the little darlings sold off both the stock market and the Bonds; apparently, "forgetting" that the money had to go someplace; I responded by buying a lot of out of the money UST Callls; I sold them again on Thursday, (Isold too soon; which of course, is perfect), and made enough on this one trade to spend the whole winter in Mexico; relaxing and going fishing.

DeadFred's picture

Regime changes don't happen that often but this sure feels like a "changey" time to me. Cyprus and Japan and now the NFP (BLS not lying)

Downtoolong's picture

A lot of old relationships and correlations seem to be broken in the new normal. I remember watching the Vanguard HiYld Bond Fund almost religiously track with the S&P500 at about a 50% pace. That bond fund has only moved a few tics this year while stocks have gone on their rampalooza. The narrowing and focusing effect of central intervention is evident almost everywhere.  

Trampy's picture

In the olden days of a few years ago central banks were limited to having sovereign obligations on their balance sheets.  Two nights ago Japan announced that they'd be buying ETFs and REITs with their massive new yen printing.

Weimar is already here!

LawsofPhysics's picture

85 billion per month (that we know of), stop trying to trade on fundamentals.  So long as they can print, they will.

new game's picture

all depends on who you are talking to.

mortgage banker:rates are going up-lol

talk to me:down, to keep this fucking mess on the tracks...

talk to abe; crash the plane and take out as much as possible.

mkkby's picture

I don't follow the correlations this author is referring to.  And he doesn't explain them, so why bother reading?

Everything points to the economy slowing and earnings peaking.  So if the stock market recognizes this and corrects, why wouldn't bonds rally further?  Also, if people in Euro land no longer trust their bank deposits, why wouldn't that also be bullish for bonds as a safe haven?

The graveyards must be full of bond bears who insisted yields couldn't possibly go lower.  Not with my money.


govttrader's picture

1)  Because bonds have already rallied...

2)  Here's an update...i'm a trader...not an investor

SAT 800's picture

And now we'll get to see if they continue to rally. You want this too much; it's a fifty-fifty bet. On the other hand June Cattle have to go up to better represent the Cash Market; and they will.

Trampy's picture

Recent basis explosion in meats was triggered by the corn collapse due to 400 million bushels being created out of nowhere on 3/28 by USDA.  My advice is book those LEM3 profits before WASDE April 10.  What if the sequester caused USDA to cut back on their survey efforts and tweaked the model they use so it's completeley unvalidated and so the supposed corn surplus from last Thursday turns out to be bogus?

You heard the phrase: "Good enough for government work!" ? 


SAT 800's picture

Also a trader; I took my 2,000 hit on my short position in ZB this morning; and closed out my short in the ESfrom 1554 at 1533; and got a zero loss stop exercised on my short on the Euro from 1.3065.  Il like to have zero loss stops on positions that are profitable; which the Euro short was, because I either need a large profit or no loss. I also bit off the 1,900/ contract I made in Dec. Silver; bought at $27.07 the day before yesterday; to close the week ahead 900/contract. Safe haven buying can occur at any time; it's not necessarily correlated to the S&P. the recent deluge of Yen has affected the tone of the Silver Market, and may be an actual event to the long Bond Buyers; in addition to the short covering you witnessed. I'll short ZB again after the auction next week; or even before that if it gets really goofy.

ebworthen's picture

Algos playing equities, rotating in and out of sectors and names.

Europeans and funds buying treasuries to try and cover their asses.

No, they aren't paying attention to each other, and these aren't markets anymore.

willwork4food's picture

What if I sold everything I have, moved to a motel and put all the money in FB?

uncle_vito's picture

This guy trading his own money.   Seems he could be broke real soon taking this kind of risk.

Trampy's picture

It beggars belief that anyone would put on such a large trade with TOS because their platform is constantly crashing and slowing to molasses.  And, unlike OEC, which has long allowed account protection by setting a maximum allowable daily drawdown before server-side automatic liquidation, TOS has no such feature.  Plus, their price feeds are now heavily filtered on volume spikes with tick charts running up to 15 seconds late.


SAT 800's picture

In futures trading risk is whatever you want it to be. You enter stop losses for your positions that determine how much you are risking if the market doesn't move the way you bet. This is why it can be a business; and not a hobby; because you can have small; or manageable losses; and large profits.

RaymondKHessel's picture

What about Gold vs SPX vs TSY...

disabledvet's picture

In no way am I calling myself an expert in the field of Treasuries...let alone in trading them. It doesn't seem to have hard to have made a fortune in "the complex" by simply being long the whole thing.I've never understood the bear case relative to an economic recovery and inflation. The dollar bottomed over a year ago. "the problems are Over There now." and they are HUGE problems. I have no idea what the connection between equities and treasuries could possibly be. In the 90's they both soared together. Needless to say courtesy of 9/11 the treasury market just kept moving higher. After 30 years of pretty much going straight up I would agree "this shit should take a breather." I'm saying the exact opposite of course. I can easily see the 30 year dropping to around 1.25 percent. Good luck covering that short...

govttrader's picture

if the 30yr were to drop to 1.25% (currently 2.98...implies a massive curve flattening and economic collapse)...I would expect the S&P to be trading around 700 (similar to what happened in the 4th quarter of 2008).  In that case, my trade will make a fortune because i am short the 7yr point...and the 7yr yield is already 1.15%.

Panafrican Funktron Robot's picture

You're shorting two asset classes that are being propped by the Fed.  It's ballsy, and I appreciate that you actually posted your trade, but history is littered with dead men of considerable testicular fortitude.  


SAT 800's picture

"You would expect"; unfortunately the market doesn't care what you expect.

SafelyGraze's picture

"This is the most rich these markets have been relative to each other in years."

which means stock prices are set to rise 6.4% to close that gap


SAT 800's picture

As Physicists like to remind us; anything that is possible will happen sooner or later.

machineh's picture

Tuesdays and Fridays ain't so great either.