Bond Evaporation

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UPCOMING EVENTS

Bond Evaporation It's not just the equities markets were things have run amok. Volume and liquidity have gone missing in the global bond markets too in a big, bad way. According to Bloomberg: The boom in fixed-income derivatives trading is exposing a hidden risk in debt markets around the world: the inability of investors to buy and sell bonds. While futures trading of 10-year Treasuries is close to an all-time high, bond-market volume for some maturities has fallen a third in the past year. In Japan's $9.6 trillion debt market, the benchmark note didn't trade until midday on two days last week. As a lack of liquidity in Italy caused transaction costs in the world's third-largest sovereign bond market to jump last month, Lombard Odier Asset Management helped propel an eightfold surge in Italian futures by relying more on derivatives. The shift reflects an unintended consequence wrought by central banks, which have dropped interest rates close to zero and implemented policies such as buying debt to restore demand in economies crippled by the financial crisis. Inefficiencies in the $100 trillion market for bonds may make investors more vulnerable to losses when yields rise from historical lows. "Liquidity is becoming a serious issue," Grant Peterkin, a money manager at Lombard Odier, which oversees $48 billion, said in a June 11 telephone interview from Geneva. The worry is that when investors try to exit their positions, "there may be some kind of squeeze." That concern has caused investors to pour into derivatives, which are contracts based on underlying assets that can provide the same exposure without tying up as much capital. Trading in Japan, the world's second-largest bond market, has virtually ground to a halt as the central bank gobbles up about 70 percent of the interest-bearing debt sold each month. On four days last week, the benchmark 10-year note opened late. Even in the U.S., the world's deepest and most-liquid government debt market with more than $12 trillion outstanding, buying and selling has decreased as derivatives have surged. How will the central planners fix this? Read Past Issues of Larry's Newsletters at TradeWithLarry.com

The morning session started off with goof volatility yesterday, as we swung from session highs to session lows and back. Then things quieted down dramatically, as the markets limped Into the close. This is preceding the FED announcement tomorrow, so I would expect something similar for today's session. We may even see the major averages trade a bit slower today. We could see the markets prop up higher esrly on, and retrace back and then some today. There could be strong moves, but I anticipate a quiet session for today. Read More

TECHNICAL DATA ES 1931.50/1925.50 POC 1929.50 YM 16715/16673 NQ 3776.25/3762.75

What is one of the biggest differences option trading presents that more conventional investment choices do not?  The element of time decay.  You can theoretically hold a stock forever or you can hold a bond to maturity, but options are a decaying asset.  That is neither a good or a bad thing in and of itself, but something that must be considered in your risk management.  Let's take a look at our position and subsequent risk management.  Read More

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