"A Violent Downside Break": Why One Trader Thinks The Christmas "Pain Trade" Will Be Especially Painful

Before you shut down that terminal for the year, hoping that the year is - mercifully - finally over, you may want to consider that according to former Lehman trader and current Bloomberg macro commentator Mark Cudmore, the Christmas pain trade is about to be unveiled, and it will be especially painful for all those short Treasurys. As Cudmore warns, with ten-years stuck in a 2.3%-2.43% range for the past seven weeks, "the arguments are adding up for a violent downside break during the weeks ahead."

Here are his arguments why, as laid out in Cudmore's latest Macro View :

A Treasuries Rally May Be the Christmas Pain Trade


Post-Fed price-action suggests Treasury bulls may stampede while traders are in holiday mode. 


Ten-year yields have been stuck in a 2.3%-2.43% range for the past seven weeks. The arguments are adding up for a violent downside break during the weeks ahead.


Many investors were punting for a hawkish turn from Yellen this week. There was indeed a subtle, but important Fed shift, but it was dovish. The committee raised growth projections, that also incorporated tax reform, without raising the dot plot.


The implication is that they’re struggling to explain “transitory” low inflation. Maybe there’s an increasing acceptance that either the Phillips curve is broken or that they should be paying more attention to structural disinflationary pressures from technology, globalization and demographics.


And investors seem to have overlooked the fact that it’s still very far from certain that the tax bill will be passed before year-end. Come January, the Republican majority in the Senate shrinks to one.


With Trump having already been celebrating and promoting its imminent passage, there will be real disappointment for markets if the tax package is delayed. And the problems are mounting up, from Rubio’s recent objections to McCain’s health concerns.


With optimism priced in everywhere and complacency across assets, traders may be wrongly positioned and vulnerable to a low- liquidity surprise.


This day last year, in the wake of a Fed hike, the 10-year Treasury yield reached the highest level of the last three years before tumbling 21 bps from that peak by year-end. Fundamentals may be adding up to a repeat performance.


b-sugar Fri, 12/15/2017 - 06:17 Permalink

Where the fuck is the "warning number..." guy? He is needed lately.  I'll repeat myself but stock wise, it's all good until may, from there, we'll see.

Harry Lightning troubadourcapital Fri, 12/15/2017 - 06:51 Permalink

Daily Price Charts for long dated US Treasuries are flashing bearish divergences at every turn in the last ywo months, its only a matter of time becfore the move to 3.25% and above occurs in the US long bond market. Bulls have been trying for two months ot drive prices back up to the highs of early September and eacg successive rally is demonstrably weaker than the one before. Only a news story of significant effect, one that could turn the stock market bearish and keep it that way for longer than a day, could inject the kind of vibrance needed at this time of year to stoke a major bond rally into year end. Even if the tax reform bill were to fail, the inflationary and deficit-proppinh impact of the bill is so small that the offsetting relief in the Treasury market would be equally small. Especially when most all desk and fund managers want nothing more than to enjoy the solitude of the holidays.

In reply to by troubadourcapital

Harry Lightning TimmyM Fri, 12/15/2017 - 07:42 Permalink

I don't see desperation on anyone's part in this discussion, becauseeven at present levels, a big sell-off or rally is not going to get more than 25 or 50 bais points This isn't April of '79 you know.Regardless of global market or mom and pop store, some facts of life don't change, And one of them is that if you want to borrow money for a long time into the future you need to compensate for the gheightened risks of both credit and inflation. Those risks have been quantified over a long period of price discovery, and only recently due to central bank manipulation through QE programs have the long term relationships deviated. The bottom line remains that Tresuries are grossly over valued at prsent prices, making the prospect of a huge rally in them hardly plausble.

In reply to by TimmyM

HRH of Aquitaine 2.0 Harry Lightning Fri, 12/15/2017 - 08:27 Permalink

I cannot stand bond discussions because the language used is so obscure to anyone not in the bond trading business.

Nonetheless, I find your comments intelligent and based on years of experience. I respect that (unlike some of the putz's on this thread).

The spread between the 2-year and the 30-year bond is less than 1% at the point which indicates a flattened yield curve. It is my understanding that a flattened yield curve is a negative indicator for bonds. Is this not the case and, if not, can you explain why?

Namely, you said in another comment in the is thread that you thought rates would rise to 3.25%. I agree. I was quite young in the 1980s but I remember the dread of inflation. I was able to refinance my mortgage with a 30-year fixed rate for 2.875%. I don't think I will ever see that rate again in my lifetime! In the meantime, I have been expecting inflation, price inflation due to an increase in interest rates, similar to what happened in the 1980s. Do you see that happen again? Can you provide a timeframe? Or do you think that rates will go negative?

In reply to by Harry Lightning

Harry Lightning HRH of Aquitaine 2.0 Fri, 12/15/2017 - 09:29 Permalink

Its complicate dbecause at heart, the bond market is a loan market and hence, some pretty sophisticated math has to be employed to calculate values. But it all can be reduced down to a qualitative understanding that will make it more clear, which is what I have done below. I hope that it helps.Okay, the time value of money…if I lend you money for a day, I can be pretty sure you will be around tomorrow to repay me, and also that the economy in which we kive is not going to be all that different than it is today. So I will get back my money, and the buying power of that money will be pretty much unchanged…so the risk I take on for lending to you for one  day is really rather small. So to compensate me for that small risk you pay me a small amount of interest.Now the longer I lend you money, the greater these risks become, so for longer term loans you should pay me higher rates of interest than for shorter term. This is what creates a “yield curve”.  A yield curve is constituted by the various rates of interest a borrower pays depending on the length of time the loan is outstanding. The components of a yield on the yield curve are the risk that they borrower will fail in the time until maturity of the loan and hence not repay the loan (“credit risk”) and the risk that numerous economic factors will reduce the buying power over time of the money the borrower repays to the lender (“inflation risk”).Now when you lend to a government, the credit risk is very low because governments usually will be around in 10 or 30 years to repay the money they borrowed. Hence the amount of interest that a country pays to compensate for the credit risk of its borrowings does not change much over time. But the inflation risk changes as fast as the economic factors that affect inflation change, and so the rate of interest to compensate for inflation risk changes frequently, even for countries.When you see longer term interest rates fall at a greater rate relative to shorter term interest rates, its almost entirely because there is a perception on the part of investors that inflationary pressures will be falling over time, and hence the borrower need not pay as much interest to compensate for inflation risk as was previously paid. Eventually, if the economy actually does slow down and inflation actually does subside, the shorter term interest rates also will recognize the reduction in inflation risk But since there is much more risk in the longer term investments, their yields adjust first.  So when you see the yield curve flatten its because at least some members of the investment community anticipate that inflationary pressures are going to subside, and they seek to take advantage of that phenomenon by owning the present elevated compensation for inflation risk as they expect that such compensation will be lower in the future. The flattening of the yield curve for a country’s debt securities then signals the possibility that the overall economy soon will weaken and from that weakening, inflationary pressures will be reduced.It is my argument that a flattening of the yield curve in the absence of similar warnings from other forward-looking economic indicators often is a false positive. That is what I believe is happening today. Until we see a concomitant drop in factors that measure overall economic performance or inflationary pressures, the flattening of the yield curve simply may be due by a wrong headed bet by an entity or entities that are trying to manipulate the bond market. Finally, when the yield of longer term debt securities of a country rises faster than the shorter term yields, it’s usually a sign that inflationary pressures are rising, and investors want a greater compensation to offset the increased reduction in buying power of the interest the borrower is paying to borrow the money.

In reply to by HRH of Aquitaine 2.0

Harry Lightning Fri, 12/15/2017 - 06:43 Permalink

The last sentence of the article eplains why the premise of the article is wrong. Treasuries rallied in the last week of 2016 because investors found value in them as they presented the highest yields in the prior three years. That is not the case now.More to the point, the pricing of long end 10 and 30 year debt issues are far more a function of perceived changes coming in inflationary pressures rather than what dots each imbecile on the Fed Open Market Committee decides to fill in. And contrary to this low/no inflation myth perpetrated by the Fed, trailing 12 month Consumer Price Index inflation has just spent the last twelve months registering readings above 2% since this occured last in 2012, and currently runs at 2.50% through the end of November. Historically for the last twenty years, 30 year US treasury bond yields trade on average at 230 basis points above the trailing twelve month 12 month Consumer Price Index inflation, meaning that the present 2.71% yield on the security already is 263 basis points lower than where its historical fair water markresides. On top of this, the US economy hummed along briskly in November leading up to the Christmas season, and all reports so far from both brick and mortar and online sources suggest a very healthy shopping season is underway as I write. It is into this backdrop that Cudmore expests a rally, for reasons completely unclear save for it happened that way last year. Lat year, when debt issues had already been monkey-hammered from the time of the election into the near-end of year. Last year, when yields in December were at three year highs. Lat year, whent eh Federal Reswerve wasn't offloading an extra 10 billion or more of its Treasury holdings each month.Look, it very well may happen. Perhaps Cudmore is tied into a network of market manipulators who seem to delight in making the bond market do the opposite from what logic and economics suggest should happen. There certainly is support for the long end of the ztreasury market by some entity or entities who think the time is perfect for a curve flattening trade, which they have been putting in place in earnest now for mobre than a few weeks even thoguh the economy shows no signs of trending in a way that would justify anything buy a steepening of the yield curve.So that's what makes a market. But if you as me. if Treasuries are pushed higher in price and lower in yield as Christmas approaches, then Santa Claus is offering a very special gift to all bond traders who still have any gray matter left. Sell the shit out of the upmove, because once the folls playing with the market are finsihed with their games, they will have no place to sell their new-found inventory for at least 25 to 50 points higher than where they purchased it. The profits to satisfy yourtrading qutas for the first six months of 2018 will be earned in the first onth o fthe year if the market is pushed up in price to end 2017. Cudmore would be wise to revien January of 1990 to see what happens in new years when old years end with imbeciles rushing in where angels dare not tread.

GreatUncle Fri, 12/15/2017 - 06:51 Permalink

Lol ... Transitory low inflation is when the relative debt to the size of the real economy is so great you could double the size of the real economy and it would still be a "transitory" low inflation for the FED manipulated figures, but for main street however total economic devastation.

nmewn Fri, 12/15/2017 - 06:53 Permalink

lol...Virginia Heffernan‏Verified account @page88FollowFollow @page88MoreVirginia Heffernan Retweeted Steven DennisMy friend Anna taught Don Jr preschool in Manhattan. She asked him to move his mat one day and he said, “Fuck you, bitch.” He was three. Today’s for you, Anna.Virginia Heffernan added,Steven DennisVerified account @StevenTDennisDonald Trump Jr. has left the building. 9 hours after arriving. He waved. He didn't comment. Hair still slick.Show this thread4:28 PM - 13 Dec 2017...an adult woman...traumatized...by a 3yr old. Then...his dad became President. She's in a padded cell now ;-)

nmewn Harry Lightning Fri, 12/15/2017 - 08:02 Permalink

Well no one knows if it's true or not. That's the point, all we have is this moonbat tweeting anecdotally about a traumatized teacher that may or may not be real, about an incident that may or may not have happened. But if she's NOT hallucinating, there's a very good chance her friend can be found in a nut house trussed up in a straight jacket because Donald Trump is the president. Either way, I have a big shit eating grin on my face  ;-)

In reply to by Harry Lightning

east of eden Fri, 12/15/2017 - 09:04 Permalink

Who the fuck buys Treasuries, or Bunds, or GIlts, it is a guaranteed money losing proposition.First off, you have negative real interest rates (when accounting for real inflation) of over -5%.Next, you are going to have annual inflation of let's call it 3% nominal (although that figure grossly underestimates inflation)Next, you have to pay tax on the capital gains - so what is that, 20% of the earnings to maturity.So, (-5% *10) + (-3% *10) +( 20% CG on 'earnings') = actual 'value' of a 1,000.00 'investment in 10 years is a loss of 82%, in constant dollars.Who in their right mind wants to give the government their near worthless Federal Reserve Notes to receive totally worthless Federal Reserve Notes 10 years down the road. Only in the land of fiat.Here is another example I worked out the other day. I have a certain amount of my own pension investments on deposit with a couple of my banks. Let's say it is a quarter of a million. But, through the 'magic' of fractional reserve banking, my banks can turn my deposits into 80 Million dollars of loans, credit and mortgages, on which they earn a gross profit (weighted average) of 8%.They pay me 2.5% (weighted average) on my deposits, so, if you calculate their 'profit' as a percentage of my original deposits, they are making 55,777% on my money, while paying me 2.5%, on which I pay tax.Do you see the 'problem'? And they wonder why people are stampeding into crypto currencies. It's to get the fucking money out of their grubby little paws.It used to be a 'no brainer' to invest to get around this problem. You simply bought common shares in the banks, which historically, returned a combined 20% per year, in share appreciation and dividends. But now, with Basel III, your 'common shares' are the largest part of what the Basel Committee calls 'Tier 1 capital', which, in another banking crisis, will be the very first asset in line that is wiped out to zero. You lose everything while the bank re-issues 'new' common equity to any fool who will buy it.So, you say, invest in preferred shares, because they do not form part of Tier 1 capital. Well, not a bad idea, however, when the leverage in the system collapses (again), everyone who has leverage, will sell anything they can to raise capital, gold, silver, Preferred Shares etc, so, you stand to lose somewhere between 25% and 50% of the value of your 'preferred shares' in a crisis, the value of which you may not get back for a decade, if ever.There is only one group of people who could have created such an insidious theft of wealth, and destroy the sytem in the process.

Harry Lightning east of eden Fri, 12/15/2017 - 09:22 Permalink

Who the fuck buys Treasuries, or Bunds, or Gilts ? Do you have a life insurance policy ? How about a pension ? Where do you think the insurance company gets the money to pay the widow or make the monthly pension payments to the retiree ? Long term liabilities are funded with long term assets. Very important to some incredibly important pillars of the financial industry. Like if you have a business and you awant to make sure your partner has the cash to buy out your wife should you die while the business is operating. That's called "key man insurance". Additionally, there are a arge number of investors who day trade Treasury Bond futures because the price of the securities moves a around a lot from day to day. Many people are making livings trading those securities.US government securities trade an incredibly large amount wevery day, owing to the fact that there is something lie 10 trillion of them in circulation. So that's who trades them, every financial institution that has fixed income assets probably has a US Treasury security or a US government guaranteed debt security (Agency, MBS, CMO, etc...) on their books.

In reply to by east of eden

Erwin643 Fri, 12/15/2017 - 09:28 Permalink

All I know is that as a volatility trader SVXY is way overbought, with overbought RSI readings on all time frames.If not in a few days, we might have a steep market drop immediately after New Years, just like a few years back.