Thursday, November 02, 2006

Very quick update! Covering cable, selling Bunds and Gilts:

Ok, couldn't take the pain any more, so bought back GBP/USD in £5/tick with spot around 1.9080...leaves me short £6/tick. $ seems to be breaking down, and lower rates look inevitable, AS DO HIGHER RATES IN GBP (and EURO, for that matter). The rate differential was the whole rationale for me having the trade on, so if that is going to be disappearing in the coming months, it makes me nervous on the short, even if I don't think you should get 2 bucks to the pound (shopping in the US is insanely cheap as it is for us Brits).
And also selling Bunds and Gilts here...yields are BONKERS, even Trichet (head of ECB) came out today and said "10y Bund yields are extraordinarily low"...YIKES! If he thinks that, then I am going along with him...although I wanted to be short anyway (I won't mention how bad a trade it would have been for you if you'd shorted US Equities in 1996 when Alan G warned of "irrational exuberance").
10y Bunds are around 3.73%, that's with base rates at 3.25% and CLEARLY going up to 3.50% next month, and a further series of rate hikes lined up for next year. The market needs to wake up. I sold £10/tick of the Bund future just above 118.00, so that's about £75 per basis point. And I will be increasing this, I want to make £10,000 if it moves from here to ~4%, so need about £250 ber bp.
And I sold Gilt futures also today, 109.78 on the future, 10y yields are a smidge over 4.50% today. Again, £10/tick. Base rates are at 4.75%, they are going to 5.00% next week, the housing boom in the UK is in FULL-FORCE (any Americans reading this, you wanna take a close look at UK prices and how they have moved over the last few years to see that it is way more irrational than even your own housing bubble) and needs SERIOUS slowing down. Rates need to get up to 6.50% I think. Gilts are in trouble, yes they may have support from the Government enforced theft from pension funds (through forcing them to match liabilities with assets, ie. buy Gilts even if prices are crazy, see 50y Gilts at 3.75%!!!!!!!!!!!!!). This should easily see a short-term move to 4.80%, where they were recently, and again I'll be taking the position up in size, maybe 2 to 3 times the size.
Sell bonds now while you still can (even the US is over-valued, although at least they'll benefit from the oncoming rate cuts).


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