May 25. US stocks recover early sell-off, but fraying at the periphery continues

–Yields continued to edge a bit lower after Wednesday’s FOMC minutes sparked short covering.  The US ten year yield will likely close out the week holding just below the 3% mark.  The idea that IOER will rise only 20 bps vs FF target of 25 bps is primarily technical, but the market is also slightly shaving what had been very high odds for continued hikes after June.  Today is treasury option expiration; a large percentage of puts expiring out of the money.  On the call side, peak open interest is in TYM 119.5 and 120 calls at 51.7k and 57.8k.  The 119.5p similarly has 51.8k and 120p have 62.2k.  TYM currently 119-18, and will likely try to peg that strike.
–While US stocks recovered nicely after an early sell off related in part to the N Korea summit cancellation, Italian bank shares continue to make new lows.  In the last two weeks the Italia All-Share bank index (IT8300) has lost 14%.  DB also remains close to new lows, and ERB, the Emerging Market Bond Index likewise closed at a new low yesterday.
–Crude oil has put in an outside week and is lower this morning by 50 cents at 70.20, suggesting the possibility of a short term top.


Posted on May 25, 2018 at 4:43 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 23. Five year auction today provides safety and liquidity

–Yesterday I suggested we might have a possible turnaround Tuesday, which occurred on a very modest scale.  After posting a new contract high early, July Crude settled down 15 cents at 72.20.  ESM8 settled down 7.00 at 2726.00.   This morning, these moves have been accentuated, with ESM down ~20 and Crude down ~50 cents. Russell was the leader to the downside yesterday, -0.75%, after having outperformed on the recent run-up.
–Turkish lira is continuing its slide this morning.  Note that Turkey is listed as the 17th largest economy in the world at $850 billion.  Yesterday late TRY was 4.673 and last at 4.859.  The Italian bank index is also pressing new recent lows, as is DB, last at €10.84.
–Rate futures were very quiet, with the eurodollar strip pretty much unchanged.  Fed Effective has been 1.70 all week.  EM FX stabilized, except for Turkey as noted above.  Italy/ Germany 10 year yield spread declined slightly.  The pause that refreshes.
–Today’s news includes 5 year treasury auction.  Markit PMI is out, as is New Home Sales.  FOMC minutes from May also released.  Beware of discussions about language change in the next statement regarding whether rates are accommodative or moving toward restraint.  As an aside regarding rate changes, Grant’s Daily notes that “The Dept of Education announced Friday that starting July 1, undergrad federal student loan interest rates are set to jump to 5.05% from the current 4.45%.”  I don’t know if that affects outstanding debt (of which there’s $1.3T).
–Seeing a modest flight to safety into treasuries this morning and bias toward flattening.
Posted on May 23, 2018 at 5:09 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 22. EM fx and crude oil….diverging

From 2013 to the energy crash of late 2015/early 2016, oil and EM FX were strongly correlated.  Currently, oil is making new highs as many emerging market currencies make or test new lows.  I believe this divergence has to do with increased debt levels in EM, and of course, political factors in some instances.  

Posted on May 22, 2018 at 10:51 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 22. No worries

–Stress related to EM and Italian markets is taking a back seat to improved prospects for China/US trade.  Below are a few charts showing 1) a surge in Italy 5y CDS from 100 to 135 bps this month, 2) new low in the JPM EM currency index and 3) a fairly sharp drop in the FTSE Italian bank shares index.  US fixed income is mostly ignoring these developments, as are risk assets.  The curve had a slightly flatter bias as treasury auctions kick-off with today’s 2 year.  The euro$ curve was 1-1.5 lower over the first 4 years, the ten yr yield fell half a bp.  Large trades yesterday in dollars include a buyer of 25k 2EZ 9650/9625/9612 put tree for 2.0.  Settled 2.25; trade was a roll, covering shorts in the 9650p and adding new shorts in the lower strikes.  There was also an exit sale of 55k 2EM 9687/9675/9662 put fly at 2.5 (covered various levels).  While net changes were small, implied vol firmed slightly.  As June treasury options expire Friday, the cab-7 option buyer will begin replacing these positions: yesterday +70k FVU8 106.25 puts bought for cab-7.
–Crude oil continues to move higher, but markets feel a bit like a ‘turnaround Tuesday’ could develop (stocks/energy).  Given that stocks and energy are near new highs, we’ll likely see some profit taking before the holiday weekend.
Posted on May 22, 2018 at 4:57 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 20. Culling the Herd

I watched a riveting documentary on PBS the other day. I just happened to put on the tv and the program had already started, chronicling the life and discoveries of Dr Marian Diamond. From Wikipedia: Marian Diamond (nee Cleeves; November 11, 1926 – July 25, 2017) was a pioneering scientist and educator who is considered one of the founders of modern neuroscience. She and her team were the first to publish evidence that the brain can change with experience and improve with enrichment, a paradigm-breaking study that was the first hard data confirming what we now call plasticity in the brain.

The title of the show was My Love Affair with the Brain: The Life and Science of Dr. Marian Diamond (2016). In 1964 when she first released her findings that the brain’s composition can change and improve with environmental enrichment, she found hard set resistance by some scientists. Her research involved years of painstaking dissection, creating microscope slides for study and comparison.  Such was her stature that she was allowed to take a part of Einstein’s brain for study in 1985, finding that he had a higher ratio of glial cells in relation to neurons than other brains.  Of course, now we accept her discoveries on plasticity of the brain as common knowledge. The phrase, “Use it or lose it” may not have been coined by Dr Diamond, but it certainly became her rallying cry.  Now in the new scientific realms of the internet and social media, we’ve moved on to more important topics like whether you hear “Yanny or Laurel”.

What does this have to do with Eurodollar options and markets?  Not much.  But recently, this pit has been the antithesis of ‘enrichment’. Amidst some of the most mind-numbingly boring days we’ve seen, the ‘use it or lose it’ mantra has taken its toll.  I’ve found over the years, some of the most brilliant and crudely funny people I’ve ever met have been trading options on the floor.  Now, with low vols and microscopic edge, some are leaving.

I might as well insert here one of my favorite theories on brain health, as know-it-all postman Cliff Clavin explained it to his drinking buddy Norm on the tv program Cheers (set in a Boston bar).  “Well ya see Norm, it’s like this…  A herd of buffalo can only move as fast as the slowest buffalo.  And when the herd is hunted, it is the slowest and weakest ones at the back that are killed first.  This natural selection is good for the herd as a whole, because the general speed and health of the whole group keeps improving by the regular killing of the weakest members.  In much the same way, the human brain can only operate as fast as the slowest brain cells. Excessive intake of alcohol, as we know, kills brain cells.  But naturally, it attacks the slowest and weakest brain cells first.  In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine.  That’s why you always feel smarter after a few beers.”

The week was not without interesting moves.  New high yields were made in US ten and thirty year bonds, at 3.11 and 3.245.  The combination of supply concerns, firming inflation, and waning CB support have finally conspired to slightly steepen the curve and make buyers more circumspect.  Emerging market currencies continued to weaken and an index of EM FX (FXJPEMCS on Bloomberg) appears likely to test the low set during the energy market debacle of late 2015 early 2016.  This was when front month WTI crude was $25/bbl; it’s now nearly 3x higher.  EEM, the emerging market etf, is well off the high of the year but not quite through February’s low.  In the energy induced sell-off in 2016, it traded a new low below 30.  Since then it rallied to this year’s high just above 52 and is now 46.  EMB, the Emerging Mkt bond etf, trades more like fx, and is making new lows.  So there seems to be substantial divergence between EM fx/bonds and stocks/energy.  According to a Bloomberg article, “Outstanding debt securities from developing nations have ballooned to $19 trillion from $5 trillion a decade earlier.”

On Tuesday, Franklin Templeton’s global bond fund, run by Michael Hasenstab, reportedly bought $2.25 billion of Argentine debt.  I suppose those funds could have been put to an alternative use.  Not only is EM debt under pressure, on Friday the Italy/Germany 10 year spread closed at the high for the year, 165 bps. Once again the idea of government borrowing “crowding out” the private sector may come into vogue.

So far, little stress has been noted in the US corporate bond market.  A couple of weeks ago Louis Gave released a piece on liquidity and said that in 2008, the US had about $2.8T of corporate bonds outstanding, while dealer inventories totaled about 1/10th of that at $260B.  Now the US corporate market is $5.3T, but dealers, due to regulatory changes, hold only $40B, a sliver of the outstanding market.  Corporate bond etfs hold $300B.  The point is that dealers are unlikely to cushion the fall, and when liquidity is most desired, it can disappear very quickly.  As mentioned last week, corporate debt as a % of GDP is at a record high over 45%.  According to the Fed’s Z1 report, TOTAL corporate debt as of the end of 2017 was $8.95T.  A Bloomberg article (citing Wells) notes that companies will need to refinance an estimated $4 trillion bonds over the next 5 years.  That’s easy in a yield-starved, low funding rate world, but might not be as simple going forward.

The current environment should make for a robust euro$ option market, with more reasonably inflated premium levels.  Perhaps that’s just around the corner.  For now, there are still large trades that get done at a price, for example a block buyer Friday of 60k 0EH 9675p 12.5, 36d covered 9693.0 (new).  However, David Stein is again leaving the pit, and I’ve heard that some of the other market makers are paring back for the summer months. One of the European shops earlier this year decided to cease ED option activity due to lack of opportunity.  Does this make a difference in a market that is increasingly institutionalized?  Perhaps not, and maybe fewer players will be unnoticeable in a benign, low vol, environment.  But if demand for insurance premium should pick-up, then size at a price may vanish.

For now, let’s wrap up the week with a couple of beers, and we can all start Monday with fresh, more efficient brains.

Posted on May 20, 2018 at 2:38 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 18. EM FX spillover?

The impetus for this chart is the continued slide in EM ccy’s.  BBG symbol for JPM index is FXJPEMCS Index. 

This chart covers 5 years, but there has clearly been a renewed slide since Q1 of this year.  I thought the chart reminded me of DB so I decided to overlay for fun (DB at new low for this year). 

Not much of a conclusion to draw… weakness in EM not really spilling over to US equities for now, but anyone who remembers Asian crisis in late 1990’s might want to keep in mind.


Posted on May 18, 2018 at 9:36 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 18. Bond bids are dispersing

–Yields continue to grind higher with notable weakness in the long end. Thirty yield bond yield pushed to a new high of 3.245%, +3.2 bps on the day. Perhaps also worth mention is that ten year tips closed at a multi year high of 93 bps. While the moves were small, eurodollar calendars also squeaked out new highs. for example, red/gold pack spread closed 20.875, +1 on the day; it hasn’t been above 20 for two months. EDZ8/EDZ9 which had been churning around 32-33 in the early part of May closed at a new high of 41.0. 2/10 treasury spread closed 54.
–Large exit buyer of 100k EDH9 9800c for 1 yesterday vs 9720.5-21.0. Open int dropped in that strike by 50k.
–Not much in the way of economic news today and the early part of next week looks quiet as well. Aside from the inflationary implications of higher oil prices, perhaps bonds are finally facing the cold reality of massive supply.

Posted on May 18, 2018 at 4:46 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 17. I dunno if she can take any more, Captain

–The grind to higher yields continues.  At the futures close tens were up 1.5 bps to 3.09% and edged higher thereafter, with continued put buying.  For example, there was a late 20k block buy of TYN 117.5 put vs TYM 11817 for 20/64.  In euro$’s red to green calendar spreads eked out new recent highs, with the pack spread +0.75 to 12.375.
–Article on Bloomberg cites Fitch as warning about vulnerability of EM due to high levels of debt as the Fed is expected to continue to hike.
Concerns about Italy are also resurfacing with the new government, with heavy selling of btp contracts, though the ten year yield in Italy remains 100 bps below that of the US.  The global system is showing increased signs of stress.
–EDM19 trades a new low of 9705 this morning.  A few days ago there was commentary concerning the size of open interest in the midcurve 9712.5 puts (now 477k OI), but it looks like the 9700 put will be the strike of interest shortly (403k OI).  0EM 9700p settled 2.75 vs 9706.5 with 29 days to go.  The question now is whether shorts (long put holders) are anxious to monetize, or whether they press.  We’re just one 3.0% Average Hourly Earnings print from a cascade lower.  There are almost always buyers of puts in front of employment reports, and although the next NFP is two weeks away, there’s likely to be heavy trade in June midcurves between now and then.
–In terms of the very front end, the fever seems to have broken with respect to the lib/ois compression.  EDZ/FFF9 popped up 1.5 bps to 37.5 yesterday and EDM8 fell 3 bps.  EDU8/FFV8 closed at just 33.  Risk/reward heavily favors the upside in this spread.

Posted on May 17, 2018 at 5:13 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 15. BOJ wants higher bond yields?

–Libor/ois compression continued to be the main story, with EDM8 +2.5 on the day and all contracts from EDU19 back either unchanged or lower.  EDZ8 to FFF9 spread had been 39/39.5 last week and closed yesterday at 34.0, -1.5 on the day.  This move appears to have been accentuated by strategy exits; while near euro$ contracts closed up on the day, Fed Fund contracts were lower.  For example, FFN8 fell half a bp to 9805.0 on an open interest decline of 12k.  With a current Fed Effective of 1.70, a hike in June would be expected to put FedEff at 1.95, exactly where FFN8 settled.  Prelim open interest in EDM8 was surprisingly +32k, but the large buyer of EDM8 9762/9775c spds for 7.5 was an exit, with OI down 22k and 7k respectively.
–China data this morning said to be weaker than expected, though yoy retail sales of 9.4% isn’t exactly weak, especially when compared to today’s US release, expected +0.3 and +0.4 less autos/gas (month-month).   What’s significantly more important is a Reuters article relating to the BOJ: “But central bank policymakers have begun brainstorming ways to raise bond yields from near-zero levels as a first step toward ending crisis-mode policy, sources familiar with the BOJ’s thinking say.”
–The tide of global liquidity is slowly receding.  Another interesting side note comes from BBG: “The delinquency rate for subprime auto loans more than 60 days past due reached the highest since 1996 at 5.8 percent, according to March data, the most recent available from Fitch. That compares with default rate of around 5 percent during the financial crisis in 2008.”  According to the handy chart, subprime auto loans as % of ABS are at a record high over 20%.  But I’m sure there’s plenty of salvage value left in that 2016 Kia Soul.
–Once again near ED one-year calendars notched new highs.  Peak EDM8/EDM9 closed 57.5, +2 on the day, and EDU8/U9 rose 1 to 48.5.

Posted on May 15, 2018 at 5:23 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 13. Clear Sailing Ahead

In the early part of March, prior to the March 21 FOMC meeting, 5/30 treasury spread was around 50 bps.  Following that meeting it’s been in a fairly steady decline, closing at a new low Friday of just over 27 bps.  We’re now one month away from the June FOMC meeting, which is fully priced for a hike.  Is it reasonable to assume, in the wake of the June meeting, that another 25 bps will be extracted from 5/30, which will put it around zero by midsummer?


The Fed has wanted to tighten financial conditions.  A relatively soft dollar, tight corporate spreads, and tame long end rates paired with low implied vols suggests that the current round of tightening hasn’t had much bite.  Even equities, though a bit more volatile, are nearly unchanged from the start of the year.  Where conditions ARE tightening is in emerging markets, for various reasons.  However, Powell’s speech last week more or less dismisses the US influence on Emerging Mkts, noting that the Fed has been transparent in communicating intentions.


Last week long end yields barely moved in spite of new highs in crude oil.  The inflation data were slightly lower than expected, allowing the market a sigh of relief, and new long dated supply was absorbed with the same ease that Rosie uses a Bounty paper towel to wipe up spilled coffee on the deli counter.


Regarding the June FOMC, Jim O’Sullivan, Chief US Economist of High Frequency Economics and Forecaster of the Year in 2017, says that language in the statement may be tweaked as soon as June to reflect a need to upgrade the stance of FF to neutral from accommodative.  He mentioned the March FOMC minutes, and below is an excerpt which makes the case:


Several participants expressed the judgment that it would likely become appropriate at some point for the Committee to set the federal funds rate above its longer-run normal value for a time. Some participants suggested that, at some point, it might become necessary to revise statement language to acknowledge that, in pursuit of the Committee’s statutory mandate and consistent with the median of participants’ policy rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity. However, participants expressed a range of views on the amount of policy tightening that would likely be required over the medium term to achieve the Committee’s goals.


By the way, between now and the next FOMC there is another payroll report on 1-June.  If there’s a possible catalyst for higher yields, it may be the Average Hourly Wage data which now seems to be the last missing puzzle piece.  On the other hand, just for fun I created the chart below.  (I guess I’m not the only one that supports the local bartender).  It’s a bit hard to see the scale, but since the year 2000, the percentage of people employed in Leisure and Hospitality, Food Service and Drinking Places has gone from 6.2% to 8% of payrolls.  Good times.  As Wayne Campbell says, “I’ve had plenty of ‘Joe’ jobs. Nothing I’d call a career.  Let me put it this way, I have an extensive collection of name tags and hairnets.”

Of course, robots are now taking those jobs, which may hold wages down.  On the other hand every time I see a creepy demo video from Boston Dynamics I think of the good part: these kids won’t need to go into battle.  Just strap a laser on Fido here and you’ve got a heck of a fighting force. Might as well just buy the stocks of gaming companies.  They’re the ones with the technical know-how and hacking skills that will be at the core of future conflicts.

One last brief thought on EM.  Argentina quickly disintegrated from successfully selling 100-year dollar denominated bonds to getting an IMF bailout.  US corporates continue to buy back their own shares, and while some finance buy backs out of operating cash, others borrow, diluting balance sheets.  In any case, corporate debt is at a record of GDP, over 45% and above previous peaks in 2001 and 2009.  When rates rise, the flame-out can occur fast, but it’s not here yet.



5/4/2018 5/11/2018 chg
UST 2Y 249.7 253.5 3.8
UST 5Y 278.0 283.7 5.7
UST 10Y 294.4 297.0 2.6
UST 30Y 311.4 311.0 -0.4
GERM 2Y -58.0 -58.1 -0.1
GERM 10Y 54.4 55.9 1.5
JPN 30Y 72.7 73.9 1.2
EURO$ Z8/Z9 32.5 35.5 3.0
EURO$ Z9/Z0 5.5 7.0 1.5
EUR 119.63 119.42 -0.21
CRUDE (1st cont) 69.72 70.70 0.98
SPX 2663.42 2727.72 64.30
VIX 14.77 12.65 -2.12
Posted on May 13, 2018 at 11:34 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options