I felt a little bit like Julius Cesar today, getting stabbed and prodded all over the place in preparation for my ‘procedure’ on Wednesday. Unlike Julius however I survived the experience and at least thus far it appears that my rapid COVID test has come out negative as I was told I would receive a phone call otherwise. Anyway, with enough time left before the opening bell I decided to quickly put together a post for you guys:

 

All eyes are on the Fed this week and how it will respond to the bond vigilantes who have effectively thrown down the gauntlet and are now waiting for the FOMC to respond in kind. First up let me be clear that the ZB trading near 155 is not that unusual which should be quickly apparent when pulling up a long term chart.

What’s worrisome is velocity of the current sell off and in particular the context in which it’s happening. The swap rate index which you are now are familiar with  continues to climb higher by the day.

Nobody really knows what exactly this means as the OTC swap rate market is not something us mere mortals will ever be given access to. But clearly something extraordinary is going on and it can’t be good.

Meanwhile the VIX has descended back toward its new old baseline, but I for one won’t be getting too comfortable down here as this situation appears to be temporary. Let me show you why…

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As you may have guessed (as a sub) the VX product depth continues to be in steep contango, which does not bode well for the late spring early summer season.

Given that the financials have been leading this advance it’s fair to say that the FOMC decision on Wednesday will either propel them higher (i.e. the Fed sits on its hands) or will finally lead to a correction (YCC or operation twist is in play).

I personally doubt that the Fed will risk letting the bond market drop into Hades so this is my little hobby trade for the week. I obviously won’t be doing much else to due to my operation but I’ll grant myself this one as it’ll either hit it on the nose or will expire worthless.

Before I run a few weekly stats. We’ve got high standard deviation this week, which isn’t surprising as it’s traditionally a Fed week.

Distribution of returns is pretty normal historically, which in English means the outliers on the bullish side match the ones on the bearish side.

Here are the past 60 years of trading action for this week. Clearly things seem to be getting more volatile since the year 2000, March apparently used to be more tranquil.

Sharpe is pretty solid at 0.21 – again historically speaking and the big Fed decision this week could swing things either way. I usually don’t take big bets during Fed weeks as I don’t enjoy being steamrolled.

I do like the odds on the weekly % positive though – at 64% it’s a bet I’d take any day.

Putting things into context – we are heading into what usually is very enjoyable trading pre-summer season. Unfortunately I have an inkling that we are in for a rough ride this year. The bias remains toward the upside but with new ATHs in equities while the bond market is about to become unglued I plan to proceed cautiously.

Happy hunting but keep it frosty.

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