Tuesday, 19 November, 2019
First notice 29th November
Pace of rolls:
TU bearish: Asset managers remain long in TU contract, which is bearish, along with regular early roll behaviour in contract
FV bullish: Weakening asset manager positioning has become “increasingly less influential” in driving the weighted calendar spread compared with other reportable; move toward greater funding stress may flatten repo term structure, which would be bullish for the calendar spread
TY bearish: Growing wild card optionality should contribute approximately 1 tick to the net basis; cyclicals (TY spread has cheapened 75% of time in three weeks prior to first notice day) counteract likely risks to repo term structure, leaving bearish bias
UXY bullish: Levered funds — usually most impactful for the contract roll — are net short UXY while asset managers are broadly flat, which is modestly bullish; relative value considerations are also worth around a tick
US bearish: Asset manager net long worth around 2 ticks of bearish bias, while wild card option value under elevated year-end volatility adds an additional 1-2 ticks of value relative to the current net basis level
WN bullish: Positioning indicates a “minimal bearish bias,” while repo imparts a bullish bias on the roll; micro-curve relative value is less relevant for the WN roll; wild-card effect looks fairly valued
TU bearish: Asset managers’ long positioning has dropped from historic high and positions are more price-sensitive than previous. AM’s bias to roll longs forward should exert cheapening pressure on the roll. Seasonal cheapening in the calendar roll heading into the first delivery date also bearish for TU roll
FV neutral: Asset managers’ long positioning broadly unchanged and positions less price-sensitive than prior roll. Current richness in the back CTD compares with previous cycles
TY Neutral: Asset manager net longs broadly unchanged, positions less price-sensitive vs previous roll. Richness of the back CTD may limit further cheapening pressure on the roll
UXY bullish: Asset managers have shifted from net long to net short this year, positions are less price-sensitive vs. prior cycle. Back CTD richness vs. front CTD also bullish for the roll
US bearish: Asset managers’ net long positioning has increased in recent cycle and positions are less price-sensitive vs. prior roll. No curve or RV risk on the roll.
WN bearish: Asset manager net long — although declining — remains historically large. Wild-card option adds a bearish bias to WN roll as net longs roll contracts forward. No curve risk on the roll as the CTDs are the same
We are slightly bearish the TU roll, slightly bullish the FV roll, slightly bearish the TY roll, slightly bearish the UXY roll, neutral the US roll, and slightly bearish the WN roll.
TU mildly bullish: Positioning a bearish factor for the roll, although asset manager net longs are 20% less than prior roll cycle, so will have a weaker influence than recently. TU roll slightly cheap to fair value, while expected easing of funding conditions should widen SOFR/FF forwards, which is also mildly bullish
FV bullish: Scope for outgoing CTD to reverse cheapening into first delivery date is bullish for the roll; FV also cheap to fair value. RV considerations and likely improvement of funding conditions in early 2020 adds to bullish view
TY bullish: TY roll trades cheap to fair value, while repo outlook also supports bullish view. Positioning “less of a factor” compared to other contracts
UXY bullish: UXY roll trades cheap to fair value; repo outlook also supports bullish view. Positioning less of a factor, with asset-manager positions just 1% of open interest
US bearish: Asset-manager positioning is at highest level in a year at more than 20% of OI, which adds to bearish view on the roll. Roll’s cheapness to fair value and repo outlook are risks to bearish view
WN bearish: Asset-manager positioning “remains elevated,” representing 50% of OI, which could be a “dominant driver for the roll.” WN wild card could cheapen the roll but should be largely priced in
TU mildly bearish: Asset managers have maintained longs and overall positioning appears bearish; also, last four roll cycles have seen modest cheapening into the first notice day; current cheapness of the roll creates headwind to bearish bias
FV mildly bearish: Asset managers maintaining long positions bearish for the roll, while recent roll activity has seen cheapening into first notice day; current cheapness of the roll creates headwind to bearish bias
TY neutral: Asset managers have decreased net longs since Aug. 2019 cycle, while ongoing rich/cheap levels for the past month should have little impact on current roll; given that 7-year rates unlikely to selloff beyond 2%, then little chance of new 7-year note to become back contract CTD, leaving MS neutral optionality and net basis
UXY mildly bullish: Current cheapness and relative value of CTD (1.1bp cheap on spline) adds richening bias to the roll; positioning may serve as headwind, given net long among price-insensitive other reportables
US neutral: Asset managers have increased net long positioning, adding a bearish bias to the roll; however, recent roll cycles and current cheapness of the roll (back contract seen as 4 ticks rich to model-implied fair value) offset this bearish bias
WN neutral: Cheapness of the roll (bullish bias) and positioning (asset manager longs) to be main driving factors; relative value and curve should have muted impact on the roll, given no change to CTD
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