Saturday, April 07, 2007

Not so good Friday

Friday's unusual Treasury session saw the bond market react violently to the strong non-farm payroll report. The 10-year fell 1/2 point, and the curve flattened considerably to +2bps from +5.

I had posted several days ago that it was time to shorten duration. That's playing out well. My theory was based on the observation that the 10-year kept failing to break 4.50%, and that there was no justification for more than 2-3 cuts. The question is whether Friday's action was enough to bring risks back into balance.

Unfortunately, due to the holiday, I suspect there wasn't a lot of real money traders around to participate. I think without validation from long-term investors its hard to read. Since my longer term bias is for the 10-year to rise to around 4.90% I'm sticking to my slightly lower duration stance for now.

3 comments:

Anonymous said...

Are you leveraged?

I would guess, Yes. Otherwise, where would be the advantage in "trading", and you seem to be fairly active.

The other thing is that I simply can't see the Fed lowering unless there is an "End of the World" event.

It's kind of like a game of chicken. No one wants to be blamed when the dollar really collapses.

Accrued Interest said...

Mostly not.

I'd say I'm about average turnover as bond PMs go. I think the average fixed income mutual fund has over 200% turnover.

Vivek Vish said...

Do transaction costs eat more or less of one's position in bonds vs. equities?

(I have read studies that equity managers trade too much, eating into transaction costs, but equity managers CONSISTENTLY suck at stock-picking. The same cannot be said of bond investors whose individual returns are autocorrelated. So there may be a very good argument for trading a lot in bonds if you are above average.)