Feb 15. Taking downside risks ‘on board’

–Treasury yields fell Thursday, initially spurred by weak retail sales, which fell 1.2% on headline (broad-based weakness and worst since 2009).  Fed Governor Lael Brainard mentioned the miss in retail in the context of increased downside risks, and noted weaker foreign growth and political uncertainty as well.  She further said that she favored ending balance sheet run-off in late 2019.  The ten year yield fell 5 bps to 265.7.  On the euro$ strip reds thru blues were up 5 to 6 bps. Volume was light and implied vol continues to be smothered.  About a month ago the green pack 9750 straddle strip traded as high as 372, but settled yesterday at 307.5.   Sure, some of that is due to time decay, but not 17%!   

–Stocks fell, but then shrugged off the retail sales number. However, by the end of the day domestic political uncertainty again crept in, with reports that Trump would declare an emergency to build the wall.  Perhaps at the margin there was also a negative reaction to the decision by Amazon to pull out of plans for HQ2 in NY.  The general move on the political spectrum to the left may be sharpening the edges between gov’t and business.  After Trump was elected, the NFIB Small business optimism index surged and remained elevated…until recently.  Perhaps some of THAT decline is due to dragging uncertainty related to China negotiations.  But a harsher environment for big tech and business in general has to figure into the equity valuation equation.

–There is still upside accumulation of EDU9 9775/9787cs, bought for 0.75 yesterday only in 10k, but both strikes have over 215k in open interest.  Also a new buyer of 30k EDZ9 9850c for 1.0.  When Brainard repeatedly says the Fed is “taking on board” the idea of growing downside risks (in spite of solid domestic employment trends) it’s not that much of a leap to envision rate cuts in 2H.

Posted on February 15, 2019 at 5:17 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 14. Baltic Freight and Bond Vol….crushed

–Trade activity remains rather quiet.  Yields pushed higher and the curve flattened yesterday.  The ten year was up 2.4 bps to 2.706% while the 30-yr bond only rose 1.1 to 3.033.  Not much change in one year spreads, though in the very front end of the curve, both June/Sept and Sept/Dec ED spreads notched new highs at 2.0 and 3.5 respectively as the strong stock market in 2019 rekindles the idea of possible rate hikes. It’s worth noting continued heavy volume in EDZ9…total volume was 430k with the next closest being EDH0 at 280k….in EDZ9 there was one sale clip of 50k at 9731.0.  The settlement was 9729.5, -4.0 on the day.  EDZ9/EDZ0 spread was +1 bp at -17.0, once again it’s the lowest spread on the curve.

–Possible extension of the China tariff decision push stocks a bit higher.  EUR is nearing new lows.  Late last year low was 1.1216 and now 1.1270.  

–NY Fed released UIG (Underlying Inflation Gauge) yesterday.  Perhaps not too important but seems to show a turndown.  “Prices only” set fell from 2.01% in Dec to 1.92% in Jan.

–A few charts below.  At the bottom is implied and historical vol on the 30-year bond contract, mired near historical lows (longer term chart) and quite a bit below 30 and 60 day historical (bottom shorter term chart).  In Q2 2018 the ten year yield was around 3.2% with fears of a push higher, now the market has become convinced the 30-yr is locked at 3%.  

–The chart immediately below highlights the Baltic Dry Freight Index in white.  Many commentators have mentioned the drop, but I was actually surprised to see that it has fallen by 2/3rds since Q2 2018!  I have added WTI crude and stocks on the chart below.  Everything bottomed in the energy rout of early 2016.  Currently, it’s only stocks that truly embrace the idea of Central Banks keeping the liquidity spigots going.

Below is a five year chart of Baltic Dry Freight Index in white, WTI Crude in yellow, and SPX in blue.  Everything bottomed in the start of 2016.  From there, oil lagged while SPX and BDI had a zig zag rally.  Since Q2 2018, the BDI has plunged by 2/3rds and is nearing the lows of 2016

Posted on February 14, 2019 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 12. Something about Q3

–Friday’s lower yields disappeared on Monday, with tens backing up 2.9 bps to 2.659%.  However, out-of-the-money eurodollar call spreads continued to be accumulated.  Another 30k EDN 9762/9787 call spread bought for 1.75 (settled 1.5 vs EDU9 9736.5) and EDU9 9775/9787cs bought for 1 in size of 46k.  There was also a roll out of long midcurve June call spreads to July.  Sold 0EM 9800/9837cs and 2EM 9800/9825 call spreads to buy 0EN 9812/9837cs with the Short July trading 50k and settling at 1.5.  One interesting aspect of these trades is the Q3 target… buying of July and Sept expiry while June just sits.  These trades require aggressive Fed cuts for any possibility of going in the money.  As client JF notes, although rate HIKES have all been 25 bp increments, there’s a possibility of a 50 bp CUT if the economy tanks; the asymmetry of Central Bank Policy.  In some ways, these trades argue for a simple sale of EDM9/EDU9 spread which settled +0.5. Red June/Sept (EDM0/EDU0) is already -4.5. 

–The big news today is a tentative agreement to keep the government open, which is providing a boost to risk assets.  As mentioned over the weekend, a rapid one-two punch of a gov’t agreement followed by a China/US trade pact is NOT priced into risk assets. 

–CLH9 (March WTI crude) is currently up 60 cents over $53/bbl having bounced strongly off yesterday’s new recent low of 51.23.  Perhaps also worth a quick note is that Hang Seng has just surpassed the October high (from which almost all global markets sold off).  However, copper is lower today. 

Posted on February 12, 2019 at 4:55 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 10, 2019. Interest rate lethargy

What is the market telling us?  First I would point to the short term interest rate calendar spreads.  On the Eurodollar curve, the lowest one-year calendar is Sept’19/Sept’20 which closed at a new monthly low of -20.  In the beginning of January, just prior to Powell’s dovish shift on Jan 4, the lowest one-year spread was -28 and that was June’19/June’20.  At that time March’19/March’20 settled -27.0.  Just after the change of tone by Powell, spreads all rallied.  In fact, by late January, EDH9/EDH0 had surged all the way back up to positive territory, settling at +1 on 25-Jan.  EDM9/EDM0 rallied back to -7.5.  But now, even though risk assets have shaken off a bad December, interest rate markets are decidedly forecasting a lack of economic vigor that will result in Fed eases and lower global rates. 

It’s not just the euro$ curve.  Euribor calendar spreads have all compressed as well.  For example ERH0/ERH1 which was over 40 bps at the start of October, settled at 15 bps Friday.  This is below the early January low.  The ten year German Bund is just under 9 bps, also a new recent low, down 8 bps on the week, and the lowest since late 2016.  Like the US, near short sterling spreads have thus far held the lows of January, but the trend is a grind down.  The Japanese 30y yield is at a new low of 57 bps. 

In Eurodollars, option trades Friday pursued the theme of a stagnant economy which may require rate cuts by Q3.  For example, there was a buyer of 60k EDU9 9775/9787 call spreads for 1.0 (actually just under 1 as the trade was done covered).  For this call spread to fill out, the Fed would likely have to cut by 50 bps.  In addition, there was a new buyer of 50k EDN9 9762/9787 call spreads for 1.75 to 2.0. The EDM9 9737 straddle is trading 10.5 (settled 11) and someone is willing to pay 2 for a two-ease call spread in July?  While the EDN 9762.5 call settled 3.0, the equidistant 9712.5 put settled 1.25 (EDU9 9738).  As of Friday, FFF0 settled 9766.5, or 6.5 bp discount to the current Fed Effective, indicating odds of 1 in 4 for a rate cut by year end.

There was also a large buy of EDZ9 9737/9750/9762/9787 broken call condor for 1.0 (70k).  This trade would perform best with a slow grinding rally and perhaps 1 cut into the end of the year.  Nothing dramatic, but nothing to suggest a new round of economic buoyancy.  Positive return at expiry between 9738.5 and 9774.0.  Same in EDM9 is 2.25 and EDU9 is 1.75.

It’s becoming somewhat difficult to separate the markets from domestic and global political decisions.  When looking at the ten year yield since Trump, it’s pretty clear that increases in rates have been driven by the President.  In 2016, the yield surged on Trump’s election, as the market expected economic acceleration due to removal of regulatory shackles and growth policies.  2017 was sort of a sideways trade, [red rectangle on the chart below].  Q1’17 saw yields range between 240 and 260…there was a downward lull in the middle of the year, and then Q4 was again 240 to 250.  However, in the beginning of 2018, the tax package sparked another yield rise, this time up to 310, eventually culminating in a high just under 325 in September.  Now the market is forecasting a yield drift lower, indicating that the Fed stepped too hard on the brakes and that the tax stimulus has ended, so perhaps a re-visit of late 2017 yields. 

Whatever one’s opinion of Trump, he seems able to snatch victory from the jaws of defeat.  Over the balance of this month are two large deadlines: the government shutdown of Feb 15 and the China tariff of March 1.  Imagine for a minute that Trump accepts other measures besides a wall for border security, and then puts a softened proposal in front of Xi.  In other words, that he makes two deals rapidly, removing uncertainty. Stocks would likely build on January’s gains and yields would sit up and take notice of a new surge of growth prospects, especially if the Fed announces plans to taper balance sheet run-off in March (perhaps also a partially politically motivated act).  The odds don’t seem particularly high, and bond markets are thought to send more appropriate signals than stocks, but this outcome is not priced at all. 

One other topic I’d like to cover relates to Consumer Credit which was released last week.  While the press wrings its hands over household debt and student loans, I would simply say that the Household Sector is in good shape and that Student Loan debt perhaps needs to be thought of in a different way. 

In Thursday’s Consumer Credit report, student loans were reported at a record $1.569 Trillion, a pretty amazing number.  That debt is primarily the asset of the US government.  At the end of 2008, student debt was $639 million, so the increase has been nearly $1 trillion over the last 10+ years.  According to the Fed’s Z.1 quarterly report, Total Consumer Credit debt at the end of 2008 (of which student debt is a subset) was 2.644T and at the end of Q3 2018 was 3.938T, an increase of $1.294T.  I can’t quite get the numbers to exactly match from the NY Fed’s data on student loans to that of the main Fed website, but the point is that almost all of the consumer credit increase in the past ten years can be attributed to student loans!  Over the same time period US Gov’t Federal debt went from $7.377T to $17.754T, an increase of $10 trillion. 

In some ways the student loan program has been a big economic transfer program. Think of it as investment in human capital.  At the same time, college facilities have expanded, athletic and recreation opportunities have exploded.  It has likely led to university staff increases at all levels.  The wealthier families pay full freight for tuition and the very wealthy make donations to endowments and facilities.  Imagine for a second that all student debt was cancelled. A loss to the federal revenue stream of perhaps $100 billion per year in foregone interest?  Perhaps not even that much as a significant percentage isn’t being serviced as it is.  An increase the Federal Debt?   No one seems to care much about that any more.  Would the increases in expenditures on housing and consumption offset the cost?  Possibly.

Of course, it’s not fair.  Not fair to the people who skrimped and saved to pay their tuition.  Not fair in that some of the school loans didn’t finance education at all, but rather paid for spring break. But debt jubilees are coming, one way or another.

2/1/2019 2/8/2019
UST 2Y 248.8 246.1 -2.7
UST 5Y 250.7 243.9 -6.8
UST 10Y 268.7 263.0 -5.7
UST 30Y 303.2 297.4 -5.8
GERM 2Y -58.1 -57.9 0.2
GERM 10Y 16.6 8.7 -7.9
JPN 30Y 60.2 57.5 -2.7
EURO$ H9/H0 -7.5 -9.5 -2.0
EURO$ H0/H1 -10.0 -13.0 -3.0
EUR 114.59 113.26 -1.33
CRUDE (1st cont) 55.26 52.72 -2.54
SPX 2706.53 2707.88 1.35
VIX 16.14 15.72 -0.42
Posted on February 10, 2019 at 2:06 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 8. Libor Un-rigged

–The big feature Thursday was a whopping 4 bp drop in the 3-mo libor setting to 2.6970.  Trade activity was fairly light, although there was good buying in EDM9 9737/9750 call 1×2 for 0.75.  The declining libor rate along with an idle Fed is putting the 9737 strike in play.   Tens fell 4.8 bps to 2.652%, while the euro$ curve rallied a like amount, with reds thru golds +4.5 to 5.5 bps.

–Trump won’t be meeting Xi prior to the tariff deadline (net negative for stocks) and Bullard says he now feels that the Fed is somewhat restrictive, which makes it more unlikely to  sustain the inflation target.  Negative calendar spreads in eurodollars reflect the same view: a currently restrictive Fed that may have to loosen.  EDZ9/EDZ0  fell another bp to -19.0 which is a new recent low.  The spike lows in one-year calendars came on the panic sessions of Jan 3 and 4, with prints of -30.   I have attached below a chart of euribor ERH0/ERH1 (used the red/green because hikes in europe had been projected further out on the time horizon).  This spread has declined from 40 bps in October to a new low of just 17 yesterday, BELOW the level of early January.  The FT has a headline that says “German minister rejects fears of serious downturn” but the market is saying. ‘perhaps it’s not yet “serious” but a downturn is clearly here.  The German bund posted a new low of 11 bps yesterday, lowest since late 2016 (the low in mid-2016 was -19 bps).

–Back to the US,  the Fed effective is 240 bps points and the two-year treasury is 247.7.  Friend RM points out that 3-month libor is above the US ten year yield (chart below).  What does this mean to corporate America?  In a way, it means that longer term projects may not be able to be funded economically…so we’ll just return to stock buy-backs.   

–One interesting trade of note was a red/blue synthetic steepener.  If the Fed moves towards easing, the reds should lead the upside.  Buyer of 60k 0EU 9775/9812cs (7.25s) and sold 30k each 3EU 9775/9812cs (6.25s) and 9787/9825cs (4.50s).   

–Consumer credit out yesterday.  Student debt up to $1.569 T, a new high.  More on that over the weekend…  

Below is 3m libor vs US ten year treasury (green more or less represents positive carry).  Chart above is ERH0/ERH1

Posted on February 8, 2019 at 5:05 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 7. Neutral CBs stifle markets

–Once again it was a light volume day with little change in rates.  Tens fell less than 1 bp to 2.700%; thirty year auction today.  Near eurodollar contracts were modestly lower with EDM9 and EDU9 down 1 on the day, while EDM0 back rose 1 to 1.5.  Net result was weaker one-yr calendars, with EDZ9/EDZ0 easing to -18.0 (-1.5 on the day and lowest on the curve).  

–Early new buyer of 40k FVJ 114.75/115.75 call spread for 16; settled 15 vs 114-20 in FVM9.  There has been relentless selling of EDZ9 9725 strike, with over 20k calls sold yesterday.  The 9725 straddle settled 28 vs 9731.0.  Yesterday I mentioned the long green pack 9750 straddle strip, which had declined from 372 to 327 in a month.  Late afternoon it was sold down to 315, though I marked the settle at 318.5.  The change in Fed stance is sucking the life out of premium…

–However, it’s not just the Fed.  The FT this morning notes ‘European Commission cuts Italy’s growth forecast to a five year low.’  Perhaps this morning’s quote from the RBI sums up the global pivot.  “The shift in stance from calibrated tightening to neutral provides flexibility to address and the room to address sustained growth of the Indian economy…”  The new RBI head is Shaktikanta Das, who replaced Urjit Patel.  Patel bristled at the encroachment on the central bank’s independence and quit.  Now…looser policy. The recurring global theme is that easy money will support growth.  BOE meeting today also expected to trim growth forecasts. 

Posted on February 7, 2019 at 5:04 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Code Name: Jägermeister

The Russian Navy developed a “new” weapon that makes people vomit and hallucinate.


Posted on February 5, 2019 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 5. Sr Loan Officers reflect tighter conditions

–Quiet session on Monday.  Yields pressed higher, with tens up 3.6 bps to 2.722%.  EDZ9/EDZ0 is again the lowest one-year calendar on the eurodollar strip, settling at -15.0.  Jan 2020 FF settled -2.0 at 9761.0; every contract in this calendar year of 2019 is within one basis point of the current 2.40% Fed Effective.  

-Treasuries seeing a concession in front of auctions, which kick off with $38 billion in 3’s today, followed by $27b tens and $19b 30’s Wednesday and Thursday.  ESH9 at a slight new high for the year at 2726.00.

–Trump’s State of the Union this evening.  Economic news today includes ISM Services, expected 57.1 from 57.6 last.  Below is a chart of Mfg and Service PRICE categories.  Mfg prices took a large tumble last week to 49.6, lowest since Q1 2016.  Service prices are much more stable at 58.0 last.–The Fed released the Senior Loan Officer survey for Q4.  Not surprisingly, given the equity market decline in Q4, the report is downbeat.  Here are a couple of excerpts:

**On balance, banks reported expecting tighter standards, weaker demand, and worse loan performance, for most loan categories. [in 2019]

**Regarding expectations for loans to businesses, moderate net fractions of banks reported that they expect to tighten standards on C&I loans to firms of all sizes, while significant net shares of banks expect to tighten standards for all three CRE loan categories. Meanwhile, demand is expected to weaken for all business loans: Moderate net shares of banks reported expecting weaker demand for C&I loans to firms of all sizes…

**The outlook for loans to households over the next year is broadly similar to the outlook for loans to businesses…

**An expected deterioration in collateral values was the most widely cited reason for expecting to tighten standards. In addition, a majority of banks reported that an expected reduction in their risk tolerance and an expected deterioration in the quality of their loan portfolios contributed to the expected tightening of standards.

Posted on February 5, 2019 at 4:58 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options


It was a heck of a January, punctuated by the FOMC meeting of January 30, where the Fed confirmed that hikes in the FF target are over for now.  Not, as I pointed out last week, that there weren’t plenty of hints from Fed officials beforehand.  The guy who got it EXACTLY right, though often maligned for getting it exactly wrong, was Dennis Gartman.  Below is his call, made after Powell’s appearance on January 4 (this quote is lifted from ZeroHedge on Jan 7). 

Stock markets everywhere are materially stronger following the “about face” that Mr. Powell made on Friday which we think has changed the game of investment sharply… violently… dramatically… in the opposite direction from where it had been. We are now of the mind… after having been manifestly and loudly bearish of the global stock markets and most particularly of the US stock market because the Fed had been removing the fuel from the markets and from the economy via its continued and material running off of its balance sheet… that stocks are headed a good deal higher; that the dollar is headed a good deal lower; that commodities… and especially gold… are headed demonstrably higher and that the great game has changed. We do not make this statement often, but Friday was a WATERSHED shift on the part of the Fed and a WATERSHED shift on our part.

NICE CALL!  (but how long does a ‘watershed’ last?)

All assets rose in the month of January.  From US stocks to DAX, Kospi to the Hang Seng, crude oil to gold, EEM to HYG.  Not lost on Gartman is the Druckenmiller rule: ‘For me it’s never been about earnings, it’s never about politics, it’s always about liquidity.’ That quote is from a Real Vision interview with Druckenmiller (short youtube link below), from Sept 2018, where he’s actually warning about the Fed’s REMOVAL of liquidity spilling into the possibility of a hard sell off in Q4.  Also correct. 

Gartman nailed it.  If the Fed is changing its posture on the removal of accommodation, then markets will react positively from depressed levels. But let’s take a closer look.  Gartman mentions the balance sheet run-off as a primary culprit, but the Fed did NOT announce a change in the tapering schedule (they’ve dangled that carrot for the March meeting).  Also, the dollar is only slightly weaker than it was at the start of the year.  What should we sell the dollar against?  The euro? I don’t think so…  Italy has fallen into recession, and the Italy Bank Index is the only thing that hasn’t rallied but is actually right at the low from the end of the year.  The euribor curve has flattened; Eurozone growth has slowed.  Sell USD against the yen?  The 10y JGB closed the week back at a negative yield (-2.2 bps) while the 30yr ended at 60 bps, the lowest since late 2016.  (If you recall, global yields all made their lows in mid-2016, following the EM and energy rout of late 2015 into 2016).  Perhaps DXY will soften from here, but maybe the better call is to sell USD against commodities.  I.e. buy gold.  Another one of Gartman’s recommendations.  I would note however, that gold was rallying even in December on global financial stress, and was much more adept at picking up on hints being dropped in December by Fed officials that policy might change.  GLD ended November just below 116 and ended December above 121, and is now 124.50. 

I think the Fed has laid the groundwork to trim the balance sheet run-off schedule at the March 20 FOMC which is 6 ½ weeks away.  Details will, of course, be dribbled out beforehand.  Will this shift be enough to keep January’s trends intact?  I doubt it.  Negative global issues remain.  Perhaps a US/China agreement before the March deadline will provide another shot of adrenaline to stocks, but liquidity will be key, globally.   

While the Fed may slow the balance sheet run-off, the treasury is, over the longer term, increasing supply.  That is, siphoning off investment dollars from other places in order to increase gov’t borrowing.  Consider this paragraph from the TBAC (Treasury Borrowing Advisory Committee) minutes released last week:      

The Committee then turned to a presentation on the potential for innovation in Treasury’s suite of products and debt management tools. The presenting member outlined the potential for a significant financing gap over the next 10 years in the context of the potential need for domestic investors to participate more if foreign reserves were to grow at a slower pace. In a high level “blue sky” presentation, the committee discussed a list of potential products that might generate additional demand from untapped savings pools, widening Treasury’s investor base, including: additional floating rate notes, inflation indexes, nominal coupon maturities, zero-coupon securities, and other structures. It was emphasized that any of these potential ideas would require additional review and analysis before the Committee would be prepared to make a recommendation.

Hahahhahahahahha.  I LOVE this paragraph.  When I was a clerk on the old trading floor, my ‘colleagues’ and I would engage in what we called “High-level executive conference meetings” which was to say,  drinking beer and playing liar’s poker.  That’s what this sounds like.  “Suite of products”.  “Blue sky”.  “Untapped savings pools”.  I hope the guy that wrote this isn’t still paying off the loans for his MBA.  I had to look up “blue sky” on google. Here’s a result: “Thinking creatively.  Creative thinking is the process by which individuals come up with new ideas or new approaches to business.”  Honest. 


And here’s the blue-sky approach:  Let’s give them free toasters if they buy up to $250 million in floating rate notes.  Great idea!  Let’s take a break for lunch.  What exactly are “Untapped savings”??  If you widen the Treasury investor base, you’re taking market share from someone else.  The cash isn’t just hiding under a rock. 

This is how it worked for me in liar’s poker:  Someone had called four sevens.  Then 4 nines, then 5 deuces.  My turn.  “Five sevens.” (I had none; a masterful bluff). Without hesitation: CALL.  CALL. CALL. And finally, Tony Bria, “I call you, VE-HEE-A-MENTLY”.  No sevens on ANY of the bills.  That, my friends, is known as a “financing gap.”

It was also around this time that I worked for a major US bank.  They brought in sales consultants for a seminar which dragged on interminably.  At one point, the presenters suggested, “Try to engage your customers on a personal basis.  Ask them what they’re doing on the weekend.  Ask them about their families…”  My friend Tom S had enough and interrupted, “How about showing them a good TRADE IDEA?  If you want a friend, GET A DOG.”  As hard as I was laughing I could still see that the presenters were deer-in-the-headlights dumb-founded.  You need to sell more treasury bonds?  Sweeten up the yield a little bit.  Or…better yet, have the Federal Reserve (code word for ‘untapped savings’) buy them. 

Here is where we can see a little bit of a problem.  On the chart below, I have the 2 and 5 year note yield plotted against the Fed Effective rate.  Carry has lessened significantly.  Longer dated assets are within 10 bps of funding costs.  Need to sell more?  Either drop the financing rate or get the yield up on the long dated stuff.    

2y and 5y treasury yield and Fed Effective

In terms of rates, the ten year yield rose Friday, partly due to a big NFP of 304k.  On the week, the curve bull flattened, exactly as expected with the Fed shift: 2’s fell 10.4 bps, 5’s 8.0, 10’s 6.3 and 30’s 3.1.  The ten year yield closed 2.686%,  essentially the midpoint of the range I mentioned the last two weeks, between 250/55 and 282/87.  The Eurodollar curve still projects an easing bias, with the lowest one-year euro$ calendar spreads being EDU9/EDU0 and EDZ9/EDZ0 at -14.5.  Over the nearer time frame, the Fed Fund curve is worth a look, and that look, in a word, is BORING.  Every contract from February 2019 to October 2019 settled exactly on the current Fed Effective of 2.40%, that is, 97.60.  January 2020 settled 97.63, a modest nod to the chance of an end-of-the-year cut. 

The interest rate market was knocked off course by a seismic disturbance, which caused shockwaves that have now lessened in amplitude, oscillating around the final resting spot of “we’re done”.  (Hey, maybe I can work for TBAC).  So I guess it should be no surprise that implied volatility in treasuries is right back down to the lower end of the range near historic lows.

This week brings auctions of 3’s, 10’s and 30’s.  So far there has been no problem at all in absorbing supply.  Trump’s State of the Union address will be on Tuesday.  


Given Fed dots projecting 2 hikes in 2019 vs the market projecting none, it’s reasonable that low risk shots are being taken to the downside.  Ironically, if the Fed DOES announce a tapering of the run-off schedule, an increase in the FF target may again be in play.

There was a large buyer of 150k EDU9 9725/9712ps on Thursday for 2.5 bps. Settled 3.0 on Friday vs 9735.5. This theme continued Friday with buying of EDZ9 9725/9712ps for 3.5 covered 9740-40.5.  Settled 4.25 vs 9734.0.  Further back on the curve there was also put spread buying, for example 3EH 9712/9687ps bought for 0.5 25k; EDH22 settled 9748.5.  I like the idea of cheap long put spreads in blues or golds. As mentioned, the treasury curve steepened this week, and while I highlighted the historic flatness of the red/green pack spread last week, it’s worth noting that red/gold is perking up a little bit, and, with a change in the Fed’s outlook, may have found a long term bottom. 

In this context consider the futures spread between EDM22 and EDM23 (Blue/Gold June).  The near one-year calendars are all negative, but EDM22/EDM23 is +12.5.  The green/blue pack spread (year 2021 to 2022), is +6.625 and blue/gold (2022 to 2023, is +12.25).  Relative steepness in the back part of the curve could be sending a signal about forward expectations of inflation and term premium. 

1/25/2019 2/1/2019 chg
UST 2Y 259.8 249.4 -10.4
UST 5Y 258.7 250.7 -8.0
UST 10Y 274.9 268.6 -6.3
UST 30Y 305.9 302.8 -3.1
GERM 2Y -58.0 -58.1 -0.1
GERM 10Y 19.3 16.6 -2.7
JPN 30Y 65.2 60.2 -5.0
EURO$ H9/H0 1.0 -7.5 -8.5
EURO$ H0/H1 -12.5 -10.0 2.5
EUR 114.13 114.59 0.46
CRUDE (1st cont) 53.69 55.26 1.57
SPX 2664.76 2706.53 41.77
VIX 17.42 16.14 -1.28
Posted on February 3, 2019 at 8:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Short end might be frozen…but maybe NOT the long end

–A WSJ headline analyzes: ‘The Fed’s Mysterious Pause’.  There’s nothing particularly surprising about it.  Housing is weak, europe has softened, and yes, the US stocks market took a dive in December.   The Fed doesn’t WANT equity values to have an out-sized influence on spending and investing, but that’s how it has been working.  Yields dropped in the wake of the FOMC, gold jumped, the dollar fell, curve steepened.  The ten year yield fell 2 bps to 2.692%.  2/10 treasury spread rose 2.3 bps to 16.8 as the two year fell 4.3 to 2.524%. 5/30 spread rose 5.3 bps as the thirty year bond actually edged up 1 bp in yield to 3.053%.

–In euro$’s reds were the strongest part of the curve, closing +5.25 (grns +4.25, blues +3.125).  An idle Fed has been projected into the fall with this type of trade: A buyer of 30+k EDU9 9712/9725/9737/9750 call condor for 5.5.  Max profit is 7 between 9725 and 9737.5.  If one thinks the Fed is now completely out of the picture it’s understandable with EDH9 settling at 9734 yesterday….but that’s a LOT of time to grind out 7 bps with an unpredictable environment ahead.  Jan 2020 FF contract settled 9759.5, just one-quarter bp lower than Jan’19…  a Fed as frozen over the next year as this morning in Chicago.  But we know a thaw is coming….in May.

–As mentioned over the weekend and yesterday, the Fed kicked details of balance sheet reduction modifications down the road (March FOMC).  But this is a market that doesn’t require details.  What will be interesting now is the back end of the curve.  The downside move in the dollar SHOULD be an engraved invitation to buy curve.  Worth noting as well are TBAC minutes that indicated some uneasiness about borrowing plans (needs) of the Federal gov’t going forward.  Are non-domestic entities going to be load up on dollar assets without the Fed’s support in the form of rising short rates??  It does NOT seem like US vol should be at the very bottom of the historical range here.  

Posted on January 31, 2019 at 5:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options