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Stewart:
First problem with many of these spread traders is that, as in most of the
markets today, we're talking about an abnormal market that was *13* years ago.
The majority of the risk takers out there in the trenches of institutions
weren't around in 1985. There's very little collective memory out there of these
types of markets, and the models that *some* of these people are using as their
guiding light can't capture such abnormal market behaviour.
I not only wonder how much this guy is going to give up, but if he even has
thought that perhaps he was one of the lucky guys and hence, views this as an
opportunity to take windfall profits.
Best,
Tim Morge
Stewart Taylor wrote:
>
> Oh Yeah,
>
> I remember that one with a distinct lack of fondness. I was just starting
> to hedge mortgage pipes with treasury futures and options. I learned all
> about basis risk in 1985. But, even at that tender stage in my career, I
> was smart/lucky enough to recognize reasonably early in the game that it
> weren't a workin (particularly when loans began to fall out of the pipes at
> an unearthly pace).
>
> I have to wonder how some of the accounts have let themselves get as jammed
> up as they are (being on the wrong side of the basis).
>
> Just talked to a Mortgage banker who had been hedging his servicing with
> bond calls. Home run trade. He (I think mostly by accident) ended up on
> the right side of the spread but has yet to take his money out (a profit
> isn't a profit until you take it). I have to wonder how much he will give
> back, particularly now the spread is so far out of balance the other way.
>
> See ya.
> Stewart.
>
> At 11:38 AM 10/6/98 -0400, Jim McConnon wrote:
> >This is very similar to the explosive bond rally at the end of 1985. There
> >were a lot of treasury shorts versus mortgage backed securities and
> >corporate/junk bonds. The credit spreads moved out and the shorts got
> >squeezed. Same as now.
> >
> >Jim
> >-----Original Message-----
> >From: Stewart Taylor <staylor@xxxxxxx>
> >To: Timothy Morge <tmorge@xxxxxxxxxxxxxxx>; David (by way of David
> ><mking@xxxxxxxx>) <mking@xxxxxxxx>
> >Cc: omega-list@xxxxxxxxxx <omega-list@xxxxxxxxxx>
> >Date: Tuesday, October 06, 1998 10:08 AM
> >Subject: Re: Sort of off topic(LCTM)
> >
> >
> >>Tim:
> >>
> >>Look at the spreads, Treasury to MBS, Treasury to Muni's, Treasury to
> >>Commercial Paper and Junk....... Lots of trouble with domestic accounts
> >>that have hedged exposure with Treasury Bond shorts.
> >>
> >>When we talked last week about bonds beginning to take on a life of their
> >>own (outside what was going on in the shares)... Im sure that much of that
> >>bid was provided by accounts who needed to end the pain in these spreads.
> >>
> >>Anyway.... Hope all is well.
> >>
> >>Stewart
> >>Stewart Taylor
> >>Taylor Fixed Income Outlook
> >>Voice: 501-219-9774
> >>Fax: 501-228-0963
> >>E-Mail: staylor@xxxxxxx
> >>Web Site: http://www.cei.net/~staylor/
> >>
> >
> >
> Stewart Taylor
> Taylor Fixed Income Outlook
> Voice: 501-219-9774
> Fax: 501-228-0963
> E-Mail: staylor@xxxxxxx
> Web Site: http://www.cei.net/~staylor/
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