The Primary Dealers always hedge their fixed income portfolio positions in the futures markets. Looking only at their bond portfolio positions may not give us an accurate picture of how screwed they are, or are not.
We have data for their futures hedging. It’s called the COTS- the weekly Commitment of Traders. Every Friday, the CFTC publishes the positions of various players in the futures markets. Among those reports is the dealer positions.
The rest of the world focuses on the specs, mostly the big specs—the hedge funds. I say, who cares! I want to know how the dealers are positioned. After all, they’re the ones who run the games. The big specs are just the whales at the tables. Some of them are good players, for sure, but they’re not the House. The dealers are the House. We want to know how the House is positioned.
We need to know this information so that we can make a swag on just how impaired Wall Street might be. We want to do our own stress analysis of what’s happening to the dealer portfolios as bond prices move one way or the other.
We know that, since last August, the trend isn’t going well for them. I can’t quantify exactly where the breaking point is, but I think we’re close, if not already past it. In this report, I continue laying out the circumstantial case.
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