Derivatives Trading Legend: “This Is The Signal That An Iceberg Is Dead Ahead”
by Tyler Durden
ZeroHedge.com
Tue, 07/10/2018
After building out Merrill’s mortgage trading floor basically from scratch, then moving to the buyside at Pimco, one year ago Harley Bassman, more familiar to Wall Street traders as the “Convexity Maven” – a legend in the realm of derivatives (he helped design the MOVE Index, better known as the VIX for government bonds) – decided to retire (roughly one year after his shocking suggestion that the Fed should devalue the dollar by buying gold).
But that did not mean he would stop writing, and just a few days after exiting the front door at 650 Newport Center Drive in Newport Beach for the last time, Bassman started writing analyst reports as a “free man”, in which the topics were, not surprisingly, rates, derivatives, cross asset interplay and, of course, convexity.
And, in his latest note, Bassman takes on a topic that has become especially dear to the Fed and most market observers: the continued flattening of the yield curve, the timing of the next recession, and what everyone is looking but fails to see, or – as he puts it – what is truly different this time.
Bassman’s full thoughts below:
The Path Forward
Let me offer a follow-up comment related to “Catch A Wave” from June 29, 2018. The Yield Curve, as described as the difference between the T2yr vs T10yr rates, will not invert until near the December FOMC meeting. This is when to start the clock for the typical 18-month lead-time to a recession (sometime in mid-2020).
As such, I am not bearish on SPX; the front-loaded corporate tax cuts will provide near-term support for earnings while the debt balloon is deferred to the Millennials (who to their chagrin, forgot vote).
The most common push-back questions why not just execute the steepener (long 2s vs short 10s) in spot (or forward) space: Positive carry and no option cost. The other frequent comment asks: Why now? If the curve will not invert until December, one should just wait until then for a better entry level.
My answer is “yes” on both counts, those are much better executions if you have certainty; but I am not so confident.
The Rest…HERE
