Nov 16. England center stage, but a rate cut by China could provide a shake-up

–Little net change in US rates yesterday despite some fairly large flows.  Tens fell less than half a bp to 311.6.  Eurodollar strip was weak in front but held gains in back, with the blue pack (4th year) closing +1.625, strongest part of the curve.  Going into November euro$ (and midcurve option) settlement, EDZ8 came under heavy selling pressure which appears to have been long liquidation.  EDZ8 settled -1.5 at 9724.5, which caused new lows in EDZ8/Z9 at 39.5 and EDZ8/EDH9 at 12.5.  This selling is likely related to pressure from credit concerns like GE and from end of year funding issues.  Note EDZ8/9 was 60 in October, so that spread has declined over 20 bps in a month and a half.  On a side note, brexit issues have caused the same trade action in short sterling, where Z8/Z9 has fallen from 40 in early Oct to a new low of 18.5 yesterday.
–Large flows included a sale of over 100k TYF 121c at 5, OI +121k, 4s vs 118-19.5 in TYH.  Buy of >50k TYF 119.5c 19-21 was an exit with OI -55k, 16s.  Sale of TYZ 119c saw OI barely change at 190k.
In dollars, 3EU 9800c 4.0 paid 70k, new.  0EZ 9700c sold at 3.5, new +40k OI.  And 2EH 9662p bought 5.5 50k, new, settled 6.0 ref 9689.  On balance, trades favored the downside from relatively high futures levels.
–Reuters reports that China is considering a cut in its benchmark 1-yr lending rate which hasn’t been cut since Oct 2015 and now stands at 4.35%.  This would likely help Chinese shares, but may cause a break in yuan through 7, which might add to global deflationary concerns.  Another Reuters piece echoes yesterday’s theme of downplaying the chance for progress at the Xi/Trump meeting in 2 weeks at the G20.  China’s written response on trade issues said unlikely to provide any break-throughs.
–November midcurves expire today with 2EX 9687.5^ 4.0 settle vs 9686.5 and 3EX 9687.5^ 4.5 vs 9690.  Light news today with Industrial Production expected +0.2%.  Drama surrounding May’s chance of survival is likely the biggest story.
–The IMF has added to the chorus warning about leveraged loans and weak covenants.  New highs for the year yesterday in both IG and HY 5-yr CDS.
Posted on November 16, 2018 at 5:10 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 15. Powell and the Pound

–Treasuries are higher and stocks marginally better in the wake of Powell’s comments.  The drop in GBP on the resignation of cabinet member and Brexit negotiator Raab is likely also a contributor to the UST bid. (GBP testing the year’s low, now 1.2778 vs ytd low 1.2665).  No drama in Powell comments.  No indication of a change in balance sheet normalization.  He mentioned risks in the form of “slowing global growth, less boost from fiscal actions and delayed impact of monetary policy” though he added that the Fed has a good sense of these risks. The eurodollar curve continues to forecast economic malaise by the end of next year, with calendar spreads from EDZ19 forward either flat or inverted. EDZ9/EDZ0 settled zero; spreads in front are positive and behind are negative. Yesterday, the strongest contract on the strip was EDH20 closing up 5, with successive contracts showing smaller gains as the curve steepened on weak stocks. Ten year yield fell 3.3 bps to 3.12%.
 –CPI was about as expected with Core yoy +2.1.  Later in the day NY Fed released their Underlying Inflation Gauge UIG: the Full Set fell from 3.10% in Sept to 3.07% in Oct and Prices only increased slightly from 1.94 to 2.00%.  Today brings Philly Fed, with the headline number expected 20.0 from 22.2 last.  Prices paid peaked in July at 62, and then tailed off from there, with last at 38.2.
–A lot of talk about AAPL which has fallen 20% from the high in early October.  On the other hand, from the late April low of 160 to the Oct high of 233, the increase was an eye-popping 45%.  An analyst on CNBC proclaimed a target of 165 (closed yesterday 186.80) and was met with snarky smirks… but is it crazy to think that April’s levels could be revisited?
–Although corporate spreads overall remain tight, I include below a chart of Investment Grade CDX which is at a new high for the year as GE and PG&E send some shivers through the market.
Posted on November 15, 2018 at 5:11 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 14. We’ve got (global) issues

The plunge in oil is the big story, with CLZ8 settling 5569 down 424 on the day.  From the high in October it’s down 28%.  In 2015 the Fed stalled its first interest rate hike as energy and emerging markets were stressed, but this time around a Fed hike is considered certain in December with Jan Fed Funds at 9760.5 (2.395%) vs current Fed Effective of 2.20%.  The longer term effect from oil’s drop is unclear; yes it provides a purchasing-power boost to consumers but there is also a lot of production in the US, and investment is likely to be curtailed.  In the short run though, this type of move causes blow-ups and dislocations across markets.  Bloomberg helpfully ran a headline which said …Supply and Demand Concerns Roil the Market (thanks). A scan of other headlines reveals a much larger picture, and that’s of a global synchronized decline in growth:  Reuters notes that, “Japan’s economy shrank more than expected [-1.2%] in the 3rd quarter, hit by natural disasters and a decline in exports, a worrisome sign that trade protectionism is starting to take its toll…”  Another article notes that Germany’s economy contracted -0.2% quarter over quarter on weak trade.  WSJ: “More signs of trouble in China’s auto market.”  Having been at 4% late last year, China’s sovereign ten year yield is catching down to the US, now at 3.42% vs a close of 3.14% in US tens.
–Guggenheim’s Minerd yesterday tweeted “the slide and collapse in investment grade credit has begun.”  At the end of 2015, start of 2016, spreads exploded as energy companies had difficultly servicing debts.  If we are truly in a global slowdown, spread widening will be much more pernicious and broad based as rates are at a higher base and there’s a lot of debt which needs to be rolled.
–A couple of large trades yesterday to highlight: Buy of 80k TYZ 118/119c spd 26 to 30.  Settled 32 vs 118-165.  Roll of long to a higher strike, OI -47k in 118c and +57k 119c.  Another interesting late trade which was a new position: Buy 16k 0EH 9687.5p to sell the same strike in 3EH.  Flattener trade, paid 3.0 for the 0EH over.  The underlying futures spread settled -7.5, 9679 vs 9686.5.  Depends on the Fed continuing to pursue tight money policy.
–News today includes CPI expected yoy 2.5% with Core yoy +2.2%.  Late afternoon Dallas Fed President Kaplan and Fed chief Jerome Powell discuss national and global economic issues, 5:00 PM EST.
Posted on November 14, 2018 at 5:13 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 13. GS technicals

Note: this is not a recommendation.  Just a test of technical analysis for pleasure.  Goldman has broken through a neckline on a head and shoulder formation on the heaviest volume of the year.  Technically should target 175 to 180 at minimum.  The 50% retracement from the low of 2016 to the high of 2018 is 207.  We’re now below that level.


Posted on November 13, 2018 at 11:38 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 13. Further signs of slowdown

–Stocks were smoked on Monday with the Dow down 600 points, SPX and XLF (Financial ETF) were both down 2%.  AAPL plunged 5% and GS nosedived 7.5%.  Yields pushed lower.  Though it was a bank holiday, according to futures prices at settlement, the ten year yield was down around 3.6 bps to 315.3.  The eurodollar strip from reds though golds was up 3 to 3.25 bps.  Red/green eurodollar pack spread fell 0.25 to close -3.5, a new monthly low.  The eurodollar strip continues to forecast a slow economy in 2020, with EDZ19/EDZ20 just holding at zero, and one-year spreads just behind at negative levels.
–Oil has fallen 11 sessions straight in a breathtaking decline.  As of this writing CLZ -1.33 at 58.60.
–Reuters reports that China’s total social financing is slowing, with yuan loans extended in October at 697 billion yuan vs expectations of 862b.  From the article: “…growth of China’s outstanding total social financing slowed to 10.2% from a year earlier, again an all-time low, central bank data showed.”
–ECB’s Praet says euro area economy still needs support from the ECB [isn’t Italy trying to provide fiscal support with the budget?]
–NFIB Small Business Optimism this morning.  CPI is released tomorrow and Powell will be at the Dallas Fed: ‘Robert Kaplan President and CEO of the Dallas Fed will discuss national and global economic issues with Jerome Powell…”  Event at 5:00 EST on Wednesday.
Posted on November 13, 2018 at 5:06 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

How do we do it? VOLUME

An abbreviated comment this week…

On the trading floor there were all sorts of nicknames and comments for people, some of which (ok maybe most) were derisive.  One referred to a guy who was running a large floor brokerage operation, and someone said, “He woke up on third base and thought he hit a triple.”  It’s so stupid it’s funny, but also a reminder that sometimes if you can just ride the wave you don’t need a whole lot of ‘smarts’.

I ran charts with open interest on treasury contracts, and a friend of mine (thanks DW) remarked, “I didn’t realize open interest was that large.  It looks like a chart of the CME.”


Sure enough, above is a chart going back to 2007, with the Five-Year futures contract in white, aggregate FV open interest in green, and the share price of the CME in amber.

The CME is an innovative risk-management and risk-transfer institution.  It’s on the cutting edge of technology.  Markets are deep, liquid and transparent.  But the stock price appears to be dependent only on the vast increase of US debt!  Sure, open interest growth probably has something to do with the increase in rates (and related hedging demand) since 2016.  But a key driver just seems to be that’s there’s a lot more of this stuff.

All in trillions Q1 2008 Q2 2018 % INCREASE
Federal Debt 9.438 21.195 225%
Federal Debt Held by Public 5.334 15.484 290%
Federal Reserve Balance Sheet 1.2 4.1 342%
US GDP 14.6 20.6 141%
FV Aggregate Open Interest (mio) 1.82 4.76 262%


It seems clear that open interest is dependent on the amount of Federal Debt Outstanding.  It also seems pretty obvious that the boost in government debt hasn’t had as much of an effect on GDP growth as one might think.  But it’s just as clear as a bell that what matters to the stock price is treasury open interest, driven by debt increases!  Which brings me back to a Stanley Druckenmiller excerpt from a speech in 2015:  “The other thing he taught me is earnings don’t move the overall market; it’s the Federal Reserve Board.  And whatever I do, I focus on the central banks and focus on the movement of liquidity.  Most people in the market are looking for earnings and conventional measures.  It’s liquidity that moves markets.”

Of course we all know that correlation may have nothing to do with causation.  However, the current theme with the Federal Reserve is a withdrawal of liquidity, which acts as a net negative for overall equity prices.  As Citi said in a recent note, the combination of large budget deficits and balance sheet withdrawal create a situation where domestic savers must be relied upon to clear the (bond) market.

A quick survey of the week’s action finds treasury yields at or near new highs.  The dollar index is also at a new high for the year.  The CRB commodity index is very near the low of the year as WTI crude has plunged over 20% from the high close in early October.  The euro$ curve remains inverted from reds to greens and greens to blues.  SPX, Nasdaq and DJIA are still higher on the year, but Russell and DJ Transports are about flat or lower.  The markets are signaling that the Fed is on the verge of being too tight, but official employment and inflation data suggest that more rate hikes are in order.   Of course the Fed wants more ammo to fight the next downturn; it might be the case that Barney Fife’s fiscal bullet has already been spent.  If a downturn does indeed materialize, then automatic fiscal stabilizers will only worsen the deficit and grow the supply of bonds. (So buy CME?)

The driver seems to be front loaded fiscal stimulus and a Fed that is leaning against the growth that is filtering through the economy, perhaps at a decreasing rate.  A political dynamic between the White House and the Fed complicates the picture.  The next Fed meeting is just over 5 weeks away.  Prior to that I wouldn’t be surprised if there are hints of a slowdown in balance sheet reduction.

By the way, if you look closely at the chart above, you can see that CME stock declined marginally in 2011.  Yes, that’s when they de-listed the pork belly contract.  But treasury supply was even able to overcome that particular misstep from CME management…


Ten year treasury yields tickled new highs on Thursday, but pulled back Friday in spite of higher than expected PPI data, Core yoy +2.6%.  On Wednesday Core CPI is expected +2.2%.  A 2-yr yield that approached 3% this week provides strong competition for stocks.  On the longer end tens left a (temporary?) double top just shy of 3.24%.

There has been a decent amount of call accumulation in Feb TY calls, which expire January 25, just prior to the January FOMC which is on the 30th.  January TY options expire on December 21, just after the December FOMC on the 19th.  Recall that beginning next year, every Fed meeting will have a press conference.


11/2/2018 11/9/2018 chg
UST 2Y 291.0 293.2 2.2
UST 5Y 303.6 304.4 0.8
UST 10Y 321.2 318.9 -2.3
UST 30Y 345.3 339.1 -6.2
GERM 2Y -63.0 -59.7 3.3
GERM 10Y 42.0 40.7 -1.3
JPN 30Y 87.0 88.4 1.4
EURO$ Z8/Z9 46.5 48.5 2.0
EURO$ Z9/Z0 1.0 0.5 -0.5
EUR 113.88 113.36 -0.52
CRUDE (1st cont) 63.14 60.19 -2.95
SPX 2723.06 2781.01 57.95
VIX 19.50 17.36 -2.14
Posted on November 10, 2018 at 4:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 9. It might not be perfect, but a storm of some sort is brewing

–As treasuries flirt with new high yields, the price of oil is going in the opposite direction, having completely erased the year’s rally.  On Dec 29,2017 the front contract closed at 60.42.  Late yesterday CLZ8 was 60.57, having plunged from a high of over $76 in early October, and as of this writing it’s below 60.  Yesterday the ten year closed up 2 bp at 323.2.  The eurodollar curve flattened from reds back, with reds/blues at a new low -5.125 and reds/golds at a new recent low of -2.125.
–The dollar index is moving toward a new high for the year this morning.  I hate the ‘perfect storm’ analogy, but here we have a huge drop in the price of the most important commodity in the world, and new highs in USD, both deflationary.  At the same time the curve is flattening as the Fed signals continued stringency.  However, yields at the long end are also near new highs (though treasury futures are modestly higher this morning).  Stocks are easing from the bounce seen since the end of October; SHCOMP -1.4% and Hang Seng -2.4% this morning.  I would say that this backdrop is quite negative for equities unless the Fed signals an end to balance sheet normalization or a pause in the hiking schedule; neither seems to be forthcoming.  Fed funds indicate near certainty of a Dec hike,and front end ED contracts have no bounce.  We’re already seeing weakness in housing.  Yesterday the Nat’l Assn of Home Builders said their housing affordability rating in Q3 is at a ten year low, the lowest since mid-2008.  At least one player seems to be strapping in for a bumpy ride, loading up on long February TY calls, taking advantage of low vols which were exacerbated by the post-election drubbing.  Feb 118.5 and 119 calls have been heavily bought with OI 73k and 51k.  Yesterday there was a seller of 60k Jan 119c at 6, likely just taking in a bit of premium to offset the outlay in Feb.  Feb options expire January 25.  There have been a few trend changes recently right at the beginning of the new year.  Perhaps a play for that?
–News today includes PPI with Core YOY expected +2.3%.  UofMich consumer and inflation expectations as well.
Posted on November 9, 2018 at 5:13 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 8. The Shakeout begins

Goodbye Mr Magoo

–Implied vol in treasuries evaporated as fast as Jim Acosta’s press pass.  Unceremoniously dumped like A.G Sessions.  As an example. USZ 137.5^ went from 2’00 at Tuesday’s close to 1’34 yesterday, a loss of 23% (Only 2 1/2 weeks til expiry, but still!).  Dec green and blue midcurve 9675 straddles from 18.5 to 16.0.  Large relief rally in stocks, but it appears as if there might be some second thoughts this morning.  The walk of shame.
–It was a very bearish end of the day in the thirty year bond as auction demand was shallow.  Outside day in the contract (USZ) but a lower close, and late selling put it close to the 137 strike.  Often there is a rally out of the last leg of the auction; this trade action is a large warning flag for bulls. (Although Ultra bond closed with a marginal gain).
–It’s not just the long end of the market that is suspect.  Near FF contracts also closed at their previous lows.  The Fed effective rate has been coming in at 2.20% or 97.80, and Nov FF closed spot-on at 97.7975.  Going into today’s FOMC the Jan contract settled 97.60, 20 bps above the FedEff, so the market looks for a hike with a 5 bp tweak to IEOR.  Further back, the April contract settled at 97.415, 18.5 under Jan and essentially at the previous low of 97.41.  While the short end confidently projects that the Fed will hew to a schedule of gradual hikes, it might get a bit messier at the long end.  It’s also interesting in the middle: green/blue pack spread settled at a new recent low of -4.875.  This inversion doesn’t seem to be abating, and indicates a stalled economy in the next couple of years.
–A couple of anecdotal items.  Consumer Credit increase was lower than expected in Sept at $10 B, with a decline in Revolving Credit.  (Non-revolving is autos and student loans. Driving an Uber, Back to School). A headline on Reuters notes that China October exports were surprisingly strong in an effort to beat the tariffs.  Coincidentally, US inventories rose, boosting recent GDP data.  What if we stuffed the inventory channel and no one used their credit cards to buy it?

A couple of technical notes inspired by colleague RW who relates these data to calendar spread rolls.

Peak 2yr open interest in May 2.301m contracts,  Drop in June to 1.781m,  Increase in the past three months 1.957 on Aug 6 to 2.476m now, an increase of 520k or 26%  RECORD OI

Peak 5yr open interest in May 4.020m contracts,  Drop in June to 3.681m,  Increase in the past three months 4.174 on Aug 6 to 4.804m now, an increase of 630k or 15%  RECORD OI

Peak 10yr open interest in May 4.185m contracts,  Drop in June to 3.383m,  Increase in the past three months 3.773 on Aug 6 to 4.260m now, an increase of 487k or 13% RECORD OI

Peak 10 ultra open interest in May 605m contracts,  Drop in June to 528m,  Increase in the past three months 573 on Aug 6 to 667m now, an increase of 94k or 16%  RECORD OI

Peak 30yr open interest in May 939m contracts,  Drop in June to 801m,  Increase in the past three months 840 on Aug 6 to 926m now, an increase of 86k or 10%

Peak Ultra open interest in May 1.099m contracts,  Drop in June to 964m,  Increase in the past three months 1.031 on Aug 6 to 1.071m now, an increase of 40k or 4%

Open interest is at record levels in the: Two Year, Five Year, Ten Year, Ultra Ten Year.  Does this represent activity In rate etf’s?  Due to unwinding of Fed’s balance sheet?  Should it partially lead to option premium demand?  Clearly the increases in the short end are related to hedging activity given Fed rate increases.


Posted on November 8, 2018 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Bulls and Bears

–Bullish.  The markets like political gridlock.  According to one article, there are likely to be subpoenas and investigations.  That is, nothing will get done in Congress (example, Mueller investigation).  Trump will continue to use executive power to pare back regulations.  The Fed will be more cautious in raising rates as fiscal stimulus stops.  US dollar falls, helping exports.
–Bearish.  Political gridlock.  US government debt dynamics worsen, causing the federal gov’t to ‘crowd out’ business borrowers.  Rates move higher, especially further out the curve.  Political rancor causes confidence to decline and productive investment to fall.  Illinois went deep blue, meaning the state’s finances are going even deeper red.  Likely to be a crisis within a couple of years.
 –Yesterday… ten year yield rose 1.3 bps by the futures settlement to 321.2 and then edged up another 1.6 into the electronic close to 322.8 with TYZ trading 117-29+.  The early October high was 323.4.  There was heavy buying of Week-2 (Friday expiry) 117.25 puts 6-7.  Late market was 8/9 ref 117-29 with 94k having traded.  Probably an election hedge, but auctions of tens and 30-yr bonds today are also contributing factors in a move to higher rates.
–New buyer yesterday of 35k TYG9 118 call for 49 (settled 49 vs 118-00).  It’s early for Feb options… in previous cycles when off-quarterly options traded in size, it seemed to be premium sales, not buys.  For example,  back in August, there were early SALES of USX 143 puts at around a point.  This also was a good three months away in terms of contract expiry.  Same direction, but maybe chose the call side this time because the puts didn’t work out so good.
–Stocks had a nice drift up into the end of the day closing at the high up 19 to 2758.50, however, crude oil was down 1.40 late at 61.70, lowest since April.  The front WTI contract at the end of 2017 was 60.42, so we’re only about about 1.25 away from a complete reversal of the year’s rally.
–Relating to credit quality, FT Alphaville yesterday said leveraged loan covenant quality is the weakest on record.  Fraying around the edges.  Higher rates will cause a tear.
Posted on November 7, 2018 at 4:39 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nov 6. Finally….

–Finally, the election cycle is drawing to a close.  If the constant barrage of negative ads didn’t damage consumer and business confidence perhaps nothing will.  I think the market has priced for a divided congress though reports yesterday circulated that Democrat control of the House was nowhere near certain.  If Republicans retain both houses it’s likely negative for treasuries (inflation increase/tax cuts), but even if they don’t, it might not mean that rates decline.  With the future stream of earnings discounted by higher rates, stock prices become dependent on accelerated earnings growth (increasing debt service costs are also dependent on this).  If a divided congress means less in the way of pro-growth initiatives then US budget deficits will increase, i.e. more supply of debt.  There’s a headline on WSJ site this morning “Where to Find Treasury Buyers? Not Asia”.  This article says that Asian buyers are less eager to buy US debt.
–In any case, highlights in a generally quiet session yesterday were mainly concentrated on the downside.  Buyer of 40k EDZ8 9712/9700ps for 0.75.  Also a late buyer of TY2X (Week 2 options on TY which expire Friday) 117.75/117 put 1×2 for 7/64’s.  Puts for this Friday are quite popular with over 400k open, the majority being in the at-the-money 118 strike with 114k.  By contrast there are only 174k calls open in week-2.  Apart from the election, 10’s are auctioned today and 30’s tomorrow.
–An article on Bloomberg yesterday notes risks in credit ETFs.  Key thoughts are that liquidity may disappear (actually this has been a recurring theme/warning) and that credit quality in general has deteriorated.  From the article “…about half the companies in the major benchmarks have credit ratings just one level above junk.”  The ratings agencies were accused of being asleep at the wheel during the 2008 crisis.  I would suspect increased vigilance if/when the downgrade cycle kicks in.
Posted on November 6, 2018 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options