Bond Traders - What drove todays price action?

[Jason101]

Hi, all bond traders and anyone else that may know.

I am trying to understand what news drove todays prices on the German and French bond markets.

They started off making very strong gains through the morning then at mid day they just as quickly sold right back off again to where they started.

I was wondering what news drove todays prices?

 

[SpreadDoctor]

from a fundamental point of view bonds rallied up off yesterdays FOMC news, the news was more accommodative and doveish than expected hence the rally. I know the liquidation top at 12 noon London time coincided with the BOE news, there was also 10 year auction in the US later in the day. My own belief is the move up in the morning was a continuation of the dovish news out of the US and then the sell off was the reality kicking in that the news didn't really warrant the move. I dont follow the french OATs so cant help you there however I suspect they will be heavily cointegrated to the Bunds. A lot of the local traders trade off the market profile both spread and outrights.

To get the best insight into fixed income trading I would recommend you listen in to ITC markets. I believe most fixed income prop traders in the UK tune into this and it's not cheap at around 300pm, the prop guys get it as part of their package so its included but they still pay for it via a desk fee/remote connection fee. A standard news squawk wont do the job as you will miss all the auctions.
If you aren't already you will need to be watching the US 10 year from around midday when this kicks in.

 

[Jason101]

from a fundamental point of view bonds rallied up off yesterdays FOMC news, the news was more accommodative and doveish than expected hence the rally. I know the liquidation top at 12 noon London time coincided with the BOE news, there was also 10 year auction in the US later in the day. My own belief is the move up in the morning was a continuation of the dovish news out of the US and then the sell off was the reality kicking in that the news didn't really warrant the move. I dont follow the french OATs so cant help you there however I suspect they will be heavily cointegrated to the Bunds. A lot of the local traders trade off the market profile both spread and outrights.

To get the best insight into fixed income trading I would recommend you listen in to ITC markets. I believe most fixed income prop traders in the UK tune into this and it's not cheap at around 300pm, the prop guys get it as part of their package so its included but they still pay for it via a desk fee/remote connection fee. A standard news squawk wont do the job as you will miss all the auctions.
If you aren't already you will need to be watching the US 10 year from around midday when this kicks in.

Thank you for your reply S.Dr.

I am a medium term technical trend follower and know very little about fundamentals, so I don't mean to conflict with your views. I am just trying to learn.

I had always thought that buying bonds was a risk off, flight to safety trade. Have I got that wrong?
If that is the case then why would dovish fed news produce a rally?

Thanks
Jason

 

[Jason101]

I am wondering if it is the other way round and today’s sell off was people selling the European bonds in order to free up funds to put risk back on i.e. in the states, which I believe is were the risk on trade money usually goes to. If this is so then it might account for the adverse correlation in the USD which happened to take place at exactly the same time at 12 noon, with the same pace.

 

[SpreadDoctor]

Thank you for your reply S.Dr.

I am a medium term technical trend follower and know very little about fundamentals, so I don't mean to conflict with your views. I am just trying to learn.

I had always thought that buying bonds was a risk off, flight to safety trade. Have I got that wrong?
If that is the case then why would dovish fed news produce a rally?

Thanks
Jason

Hi Jason

The price of bunds is driven by a number of factors, you have to remember the best brains are analysing these markets day in day out for a living and it is very competitive/efficient. It is rarely a case that one factor drives the price. Certainly in some cases it can be though. For example in a terrorist attack buy bunds/treasuries is a generally a good play (morals aside), this is pure flight flight to quality (FTQ). You may also see FTQ themes some days as equities **** out and are driven by fear, you can confirm this by following the VIX and Gold. At other times though other factors are more important. This weeks doveish tone from the FOMC made bunds go bid (as you would expect), equities also rallied (again as you would expect). Sometimes though price doesn't do what you think and then it can get into a bluff, double bluff, triple bluff game.

 

[SpreadDoctor]

I am wondering if it is the other way round and today’s sell off was people selling the European bonds in order to free up funds to put risk back on i.e. in the states, which I believe is were the risk on trade money usually goes to. If this is so then it might account for the adverse correlation in the USD which happened to take place at exactly the same time at 12 noon, with the same pace.

it is not uncommon for Bunds to take a reversal at London lunchtime which coincides with the NY open. If you are trading fundamentals perhaps you could look at trading the curve as it may be easier to isolate a specific opinion about the market and trade it.

GLGT

 

[Martinghoul]

The day started with very weak German data (exports), which was the reason behind the strong rally. Later in the afternoon we had some reasonably strong US data, so they sold off a bit. There's also a lot of random noise/positioning effects in these moves, so sometimes it's hard to know exactly why things move.

 

[Jason101]

That makes sense Martinghoul, sometimes the simplest answers are the best.