Did Primary Dealer MF Global Dump Its TSY Inventory And Exaggerate Thursday's Equity Rally?

Tyler Durden's picture

We have often discussed the use of the Treasury 2s10s30s butterfly as a carry tool and it makes sense that primary dealers would proxy this in their inventories to earn a much more risk-managed carry than a simple curve trade from a net interest margin perspective. With MF Global drawing down its credit lines and facing immediate stress, it also makes sense that they would look to sell down any and every holding they had in order to show liquidity. In the 24 hours from mid-day Wednesday to mid-day Thursday the 2s10s30s butterfly experienced one of its largest ever shifts higher (unwinding the carry trade) at over 4 standard deviations and only matched by moves in Q4 2008 (LEH?). Equity markets tracked this massive and unending rise in 2s10s30s almost tick-for-tick which we think explains how such a no-news summit in EU can create such a massive move in US equities. Moreover, the attractiveness of the 2s10s30s butterfly is reappearing up here and it is compressing suggesting stocks have room to fall here.

This shows the 1-day moves in 2s10s30s with the red dot indicating the 24hr period move from Weds to Thurs this week - over 4 standard deviations.


The shift up in 2s10s30s from Weds to Thurs was incredible in size and very notable for the hyper-correlation with ES. Today sees the low volume equity range holding up as 2s10s30s starts to get bought again (for carry) suggesting equities have some downside risk here.

Charts: Bloomberg

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jcaz's picture

Naw, that was me unloading mine.... Sorry, my bad.

Cdad's picture

Blatant bid lifting on the Roach Motel [SPY], in coordination with cotinued "horse fixing" on the TLT.  Clearly, long bond action, quite possibly as a result of MF liquidation, is the key for market price action today.

There is no market anymore.


**P. Najarian jumps in late on the silver trade just now.  Look out**

traditionalfunds's picture

The difficulty I have with this theory is that the European equities were in rocket up as much as @4% prior to the US equity market even opening. The squeeze in the US ramped in a similar manner to the Euro ramp. Gap open and a steady charge higher.


jcaz's picture

No, the talking heads were reporting that US stocks were seeing money from the Treasury market, thus trying to draw that line.

Tylers' report just disputes that notion, nothing more-  obviously, had this really been happening, US stocks wouild have been up- percentage wise- as much or much more as the Euro stocks were...  They weren't.

Further, the lack of follow-thru today says that it's far more likely that the Treasury selloff was more likely an isolated event- i.e.- MF Global.

traditionalfunds's picture

The fact that the author indicates the pattern began on Wednesday makes me more inclined agree with yours and the authors assessment.

I'd update/alter the comment but the edit button is gone.

Weird that the financials are so calm with MF Global seeing so much pressure. Trust in regulators?

Zeilschip's picture

What did the pattern say when ES went from 1060 to 1280?

traditionalfunds's picture

The 2s10s30s pattern & correlation? Ask someone with a Bloomberg terminal.

NotApplicable's picture

A butterfly exhibiting the Butterfly Effect?


css1971's picture

Is it a rorschach test or something?


Richard Chesler's picture

Stocks have reached a permanently high plateau.


ViewfromUndertheBridge's picture

Apart from that he was pretty good...but, fuck one goat.

whstlblwr's picture

Stop the government price control on stock market. Class action lawsuit. Many here who rightly short market would have claim.

"Veterans Win $7.4 Million Settlement in Federal Debt Collection Class Action
Washington, DC: A $7.4 million settlement has been reached in a class action lawsuit brought against the United States government by military veterans.

The suit alleged that the government's methods of recovering debt owed by veterans for purchases made on military bases was not acceptable because the debts incurred had reached the 10 year statute of limitations.

In 2007, Julius Briggs, a disabled army veteran, filed the lawsuit after the US government kept about $2,300 in tax refunds to pay down a $1,857 debt he incurred buying uniforms and other items on base in 1993.

According to media reports, some 6,700 former military will receive $10,000 each from the settlement, which was approved in court Thursday, January 28th.

The Wall Street Journal has reported that the class action is the first to challenge a federal agency's debt collection tactics.

Manthong's picture

RanSquawk.. MF Global (MF) spokesperson says no comment on Gasaparino report that the co. would not last the weekend according to a source..    whoa..

Cdad's picture

The BlowHorn [CNBC] has already explained to the bleating sheep that the MF story is not so much one of too big to fail but rather too small to care.

During this week, the BlowHorn has passed into the hopium world of "all news is good news"...good or bad...up or down...success or failure.  

It's all good.

El Oregonian's picture

That would mean that according to the CNBC Cheerleaders "Soft Patches" are good! Then "Good" translates into BULLISH! Bullish means BUY, BUY, BUY... There problem solved...

junkyardjack's picture

I hope so, the unwinding of these dealers and hopefully later some major Hedge Funds will provide some great opportunities to get stocks when they are actually cheap

MFL8240's picture

The use of a butterfly would never cross the minds of these upstanding traders and Wall Strret banks.  Whoever wrote this should be spanked.

azzhatter's picture

They named this company correctly. Must have known Corzine would be there one day, he's a classic MF'er

azzhatter's picture

Is Cramer still pitching Netflix? Or he still on Bear Stearns?  Guy is the definition of a punk

Irish66's picture

thank you taylor

Grand Supercycle's picture

DAX monthly chart at blog shows recent bullish candle revealing aggressive short covering rally enclosed within big picture bearish pattern.

Bullish USD weekly/monthly and bearish SP500/DOW monthly charts will eventually ensure a reversal of the equity uptrend and a significant dollar rally.



Scoted's picture

You just can't accept it can you ZH. The market rallies on decent volume and still you chant bearish, bearish, bearish!

RoscoePColtrane's picture

Decent conjecture Tyler, along with your idea that Euro rally is driven by assets Euro bank asset sales, as both of these suggest that equity markets have perversely been driven by actions that if widely known would be seen as negative and not positive.

Too bad it's all conjecture and there's no way to verify either way.