Position Update: Take Loss, Book Profit And Move Stop‏

The recommendation to receive a ½ position in EUR3Y1Y has triggered the stop at 1.55%. The position was entered at 1.195% and has rolled down 1.5bp. Including the roll down we book a loss of 17bp (½ x 34bp).

The recommendation to buy a ½ position in the Bund ASW is closed at 24.5bp. The position was entered at 19.4bp and we book a small profit of 3bp (½ x 6bp).

The recommendation to pay USD10Y10Y continues to gain. To lock in some of the profits, the stop of the remaining ½ position is moved from 3.50% to 3.70%. This ½ position was entered at 3.40%. The target is unchanged at 4.20%.

Breaking into new ranges
The rates markets remain under severe pressure. A combination of improving global macro data, a change towards a less dovish bias at the ECB and the outlook for a swift decline in excess liquidity in the EONIA market have set in motion a relatively fierce sell-off. Today’s extension of the sell-off on the back of the stronger-than-expected durable goods report seemed more a symptom than a reason.

Following a very long period of low and declining rates, it seems as if market positioning remains very bad. Many of the low-for-long positions are being unwound and the recent move higher in rates is probably starting to bite on some of the more ‘long-term’ positioning. With the business cycle now evidently improving, event risks declining and the outlook for a major liquidity withdrawal from Euro area money markets, the sell-off could turn out to be more fundamental in nature.

Both 10yr Treasury yields and 10yr Bunds yields are currently flirting with new and higher ranges, while momentum remains very bearish. With strong support levels being challenged and the fundamental situation turning less fixed-income-friendly, the sell-off could have further to go in the short-term.

On the back of the recent developments, we decided to make some adjustments to our trade recommendations. First of all, the stop was triggered on our recommendation to receive a ½ position in the EUR 3Y1Y and we close the trade with a loss. Second, we also decided to close the recommendation to buy the bund asset swap. It has performed very well in a short time. However, the performance has been driven by the sell-off in the front-end of the EUR swap market. The Bund spread widening might have further to go. But from our point of view, the position was opened as a risk-off hedge. Given the recent developments we believe the trade has less value from this perspective. Finally, we remain exposed towards higher rates through paying a ½ position in 10Y10Y USD swaps. We keep this position open, but tighten up the stop to lock in the profits, should the current sell-off reverse.

To Read the Entire Report Please Click on the pdf File Below.