Tuesday, September 25, 2012

Still hanging on to my 7/10 trade...unwind tonight?

With the late day selloff in stocks and resulting bull flattening rally in UST, my 7/10 trade has worked out nicely.  There was very little risk, and the trade has returned about 6% so far (trading a leveraged account  2bps on the curve (from 62.5 --> 60.2), and 28 ticks on the outright duration (98-23 --> 99-19)).  I'm thinking that because the late day movement in the markets took place after Europe went home, there will be a community of traders who find themselves off-sides when they login tonight / tomorrow.  I'm hoping this will provide another bid to the UST market, however short lived it may be.  If this happens, then I will sell my 2 units of 10yr notes...and then bid below to buy back my 7yr notes in the expected volatility...thereby legging my way out of my 7/10 trade.  I'm really not sure what levels to use here.   My gut says that 10yr notes could get as much as another 6-10 ticks higher in price in a low volume rally (99-28 ??)...which is what i'm hoping for during Tokyo hours.

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