(no subject)
It's Jeffrey Talpins who's buying these Treasurys that China is dumping. He and his hedge fund Element Capital Management. The guy is an intense trader, formerly with Citi and GS.
He's using a fixed-income relative value trading strategy, which has been somewhat unpopular in the regular market, but proves itself quite a performer given these pricing irregularities caused by various stimulus packages and non-standard central bank monetary policies worldwide. It's a great trading strategy for a market that's on fiscal crack cocaine; it's really a great strategy for a market in fiscal crack-cocaine crash and withdrawal, as we're having right now.
But what I wonder is: why is the U.S. Treasury selling to a private hedge fund in such quantities?
Usually, the U.S. Treasury prefers to know who is buying its bonds and why, mostly because it prefers long-term holders such as pension funds, insurance companies and central banks. But Elemental is basically an equivalent of a high-freq trader. The fund is employing bond-auction trading maneuvers, another normally unpopular strategy:
(0) These trades take advantage of the effects of supply-and-demand in the $12.8 trillion Treasury market.
(1) Demand for Treasurys often fluctuates due to varying factors, such as investor perceptions of economic growth and market risk.
(2) Supply can be affected by regular auctions of different-maturity Treasury securities.
(3) Thus, a burst of new supply tends to slightly depress prices for short periods, sometimes for less than an hour.
Element's auction arbitrage strategy is therefore quite simple:
(I) Short "when-issued" bonds - these are contracts conferring the right to purchase Treasury securities when they are sold days later at auction.
(II) Buy bonds during Treasury auctions at the slightly lower prices and use these newly purchased bonds to close out their short sales in (I).
The difference between the higher price at which they sell the Treasurys and the lower price they pay at auction is their profit.
The shakeout of 2008 left Element with hardly any competition (that's why the above strategies also became "unpopular" :)). The only other players would be whole countries, or central banks. Then - another question is: why isn't Russia buying? It was buying earlier...
Maybe because Russia is also sensing the danger: sometimes the (3) doesn't play out - the prices of auctioned bonds jump rather than fall, for various reasons (negative economic news that prompts an investor exit) - and the (II) in the arbitrage strategy becomes impossible. So, one turnaround, and Talpins is wiped the fuck out. And that's not unlikely now, considering that Element Management has been exposed, and, considering that it's a private hedge fund with limited leverage, others will try to put the pressure on it - inflicting "max pain", as it's known. This is going to inject more chaos into equity market, of course. And Russia, which is still exposed in that department, will feel the shockwaves. Just another piece of the destabilization puzzle.
He's using a fixed-income relative value trading strategy, which has been somewhat unpopular in the regular market, but proves itself quite a performer given these pricing irregularities caused by various stimulus packages and non-standard central bank monetary policies worldwide. It's a great trading strategy for a market that's on fiscal crack cocaine; it's really a great strategy for a market in fiscal crack-cocaine crash and withdrawal, as we're having right now.
But what I wonder is: why is the U.S. Treasury selling to a private hedge fund in such quantities?
Usually, the U.S. Treasury prefers to know who is buying its bonds and why, mostly because it prefers long-term holders such as pension funds, insurance companies and central banks. But Elemental is basically an equivalent of a high-freq trader. The fund is employing bond-auction trading maneuvers, another normally unpopular strategy:
(0) These trades take advantage of the effects of supply-and-demand in the $12.8 trillion Treasury market.
(1) Demand for Treasurys often fluctuates due to varying factors, such as investor perceptions of economic growth and market risk.
(2) Supply can be affected by regular auctions of different-maturity Treasury securities.
(3) Thus, a burst of new supply tends to slightly depress prices for short periods, sometimes for less than an hour.
Element's auction arbitrage strategy is therefore quite simple:
(I) Short "when-issued" bonds - these are contracts conferring the right to purchase Treasury securities when they are sold days later at auction.
(II) Buy bonds during Treasury auctions at the slightly lower prices and use these newly purchased bonds to close out their short sales in (I).
The difference between the higher price at which they sell the Treasurys and the lower price they pay at auction is their profit.
The shakeout of 2008 left Element with hardly any competition (that's why the above strategies also became "unpopular" :)). The only other players would be whole countries, or central banks. Then - another question is: why isn't Russia buying? It was buying earlier...
Maybe because Russia is also sensing the danger: sometimes the (3) doesn't play out - the prices of auctioned bonds jump rather than fall, for various reasons (negative economic news that prompts an investor exit) - and the (II) in the arbitrage strategy becomes impossible. So, one turnaround, and Talpins is wiped the fuck out. And that's not unlikely now, considering that Element Management has been exposed, and, considering that it's a private hedge fund with limited leverage, others will try to put the pressure on it - inflicting "max pain", as it's known. This is going to inject more chaos into equity market, of course. And Russia, which is still exposed in that department, will feel the shockwaves. Just another piece of the destabilization puzzle.