Stocks look to bounce at the open


Major stock index futures are all higher by about 0.4% as markets try and rebound from last week's sizable losses.

Europe's Stoxx 50 is showing moderate gains and the direction continues to point higher in Shanghai, which gained 1.7% overnight.

The 10-year Treasury yield is up one basis point to 2.50% and gold is down $2 per ounce to $1,293.

ETFs: SPY, QQQ, SH, DIA, SSO, SDS, VOO, PSQ, IVV, SPXU, UPRO, TQQQ, SPXL, QID, RSP, SQQQ, DOG, QLD, DXD, RWL, EPS, UDOW, SDOW, DDM, BXUB, QQEW, QQQE, SPLX, SFLA, QQXT, BXUC, SPUU

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Comments (3)
  • John Smith 12345677
    , contributor
    Comments (3) | Send Message
     
    aaa
    4 Aug 2014, 02:30 PM Reply Like
  • John Smith 12345677
    , contributor
    Comments (3) | Send Message
     
    The market crashed because stocks were overvalued. The Fed said so itself and called for a minor correction.

     

    July 31 was settlement day for new 2, 5, and 7 year Treasuries. Additional 10 year treasuries were issued June 2 and June 30, and another 10 year treasury auction is scheduled Aug. 13 with settlement Aug 15. What makes these auctions counter intuitive is the auctions decreased yields and increased bond prices, instead of decreasing bond prices (as you would expect when supply of treasury bonds increases...lower prices).

     

    The reason bond prices went up, and not down, is because many of these recently auctioned treasuries are now candidates for cheapest to deliver (CTD). The 10 year treasury future, for example, has several contenders for cheapest to deliver.

     

    Increasing the number of CTD treasuries increases bond futures because of implied repo rates. A dealer can simply purchase the CTD treasury, and short treasury futures. Upon futures expiration, the dealer only has to deliver the CTD security at that point in time. Since there are many CTD securities, the odds of another treasury which is even cheaper to deliver increases. This makes arbitrage more profitable, pushing reverse repo rates down and increasing the prices of CTD bonds (since there is more demand for the current CTD security). Indeed, the current CTD 10 year treasury (3 1/8's of 5/15/2021 CUSIP: 912828QN3) has been increasing in value the past few days, pushing up treasury future prices (which are based on the value of this CTD security) making bonds look more attractive.

     

    When treasury bonds are more attractive, the market falls which could be one reason why the market reacted the way it did July 31.
    4 Aug 2014, 02:31 PM Reply Like
  • John Smith 12345677
    , contributor
    Comments (3) | Send Message
     
    The market crashed July 31 not because interest rates went up, but because they went down. Treasury futures increased, making bonds seem more attractive, pushing stocks lower.

     

    Treasury futures rallied because the Fed has been increasing the number of cheapest to deliver securities for the 2, 5, 7, and 10 year treasury futures. This has decreased reverse repo rates, since you can now earn an arbitrage profit by purchasing the current CTD treasury (currently the 3 1/8s of 5/15/2021 CUSIP:912828QN3 for the 10 year treasury future) and shorting treasury futures, earning a guaranteed minimum rate of return. At expiration, the arbitrageur must only deliver one of the CTD treasuries. Since there are now several CTD treasuries for the 10 year, the odds of earning an even higher rate of return through reverse repo increases, pushing up the price of the CTD treasury and treasury futures (which are based on the value of this CTD). I think that's why bonds rallied and the stock market crashed. There is another 10 year treasury auction Aug. 13 with settlement Aug. 15. I wonder how the market will respond then.
    4 Aug 2014, 02:37 PM Reply Like
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