Core PPI higher...but Bonds don't care

30 year US Treasury futures (CBT.US) rallied smartly on Tuesday in the face of stronger equities and higher than expected core wholesale inflation measures. Core PPI, otherwise known as inflation when you take out everything that you need to live, racketed up four-tenths of 1% (+0.4%) that was more than the expected +0.1% change. None of this mattered much, at least not in the way you'd expect as bonds went on to cross old 20-day highs on a "big up" day. The 1.1% rise in bond prices took the 30-year future to 120'10, a far cry from the 112'195 low made on the third of November. Is today's reaction a sign there is more to this run?

Q: What happens when 30-year bond futures lodge a 10-day (or greater) high on the day Core PPI is released higher than expected?

A: There are 12 past instances of this unexpected turn of events with 10 of the 12 going on to greater heights over the next 45 trading days. The average return, at +2.31%, is nearly 2.5 times the magnitude of the average losers (v. the average winner the spread is even better, 3x) with an overall standard deviation of 2.69%. The trade's t-statistic is a solid +2.97, falling in the 99% confidence interval, while its Sharpe is +0.86. While high core inflation may not be good for your pocketbook, it can be good for your book of investments, especially if that book includes the 30-year Treasury.

Jason Thompson is a Chicago-based speculator focusing on electronically traded derivatives and their underlying instruments.

Let variable values:
@	=	US
theEvent	=	IF
   high of @ is more than 10 day highest of high of @  1 value ago
AND
  Date is in "ppi.rpt"
AND
  (PPI_XFE_ACT - PPI_XFE_EST) is more than 0
AND
  @ is DEFINED
THEN 1
ENDIF


      Date   Day           t+28           t+35           t+37           t+45           t+46

11/13/1991   Wed           3.72           5.00           5.40           3.34           3.56
12/09/1993   Thu          -0.69           0.64          -0.43          -1.36          -1.83
06/12/1998   Fri          -0.58          -0.56          -0.40           0.05          -0.03
06/14/2001   Thu           1.56           1.71           1.56           3.85           3.39
07/11/2002   Thu           4.73           5.20           7.26           8.12           8.42
12/12/2002   Thu           1.03           1.39           1.28           2.00           2.28
11/14/2003   Fri           1.56           0.20           1.90           3.51           2.41
06/17/2004   Thu           1.44           5.21           4.77           5.45           4.89
10/15/2004   Fri          -0.30          -0.30           0.50           1.02           0.66
05/17/2005   Tue           3.00           1.57           1.16          -0.54           0.05
06/13/2006   Tue          -0.43           0.32           0.98           1.04           1.04
08/19/2008   Tue           2.82           1.50           0.09           1.22           0.37
11/18/2008   Tue            NaN            NaN            NaN            NaN            NaN

             Avg           1.49           1.82           2.01           2.31           2.10
          AvgPos           2.48           2.27           2.49           2.96           2.71
          AvgNeg          -0.50          -0.43          -0.41          -0.95          -0.93
          PctPos          66.67          83.33          83.33          83.33          83.33
          PctNeg          33.33          16.67          16.67          16.67          16.67
         Maximum           4.73           5.21           7.26           8.12           8.42
         Minimum          -0.69          -0.56          -0.43          -1.36          -1.83
          StdDev           1.80           2.13           2.47           2.69           2.73
           ZStat           0.83           0.86           0.81           0.86           0.77
        Variance           3.24           4.53           6.08           7.24           7.45


13 Occurrences

XMIM Query Source

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