March 21. FOMC day

–Fed day. Powell’s first as Chairman.  The market seems to be geared up for a bearish hike, with upgrades in growth projections and a rise in the Fed dots.  We had already priced increased growth estimates, and while the market is on the same page as the dots for 2018, the Fed hadn’t been able to hit targets for years prior to now.  Maybe the dots will move a bit higher in 2019 and beyond….will initial selling be sustainable?  Jan 2019 FF are already fully priced for 3 hikes in 2018 at 9782.0.  Just for interest, FFF20 is at 9742.0, a spread of just 40 bps to FFF9.

–Yesterday yields pushed higher, with tens +3.6 bps to 287.9.  Some pressure attributed to inbev’s $10 billion bond issuance.

–One large trade was a buyer of >100k 0EM 9700ps for 4.0 to 4.5, from futures price 9722 to 9721.5.  These puts settled 4.0 ref EDM9 9721.5 (exchange volume showed 174k trading).  Helped push EDM8/EDM9 to 44.5 (and it was 45 bid late).  IF the Fed does raise 2019 and beyond dots, then perhaps a spread of 40 for FFF9/FFF0 is too low, and EDM8/EDM9 is too low, so it makes sense to load up on puts on EDM9.  Libor/ois continues to grind higher, with, for example EDM8 vs FFN8 settling at 46.5, out 2.5 on the day.

–Atm green and blue midcurve straddles now identical.  Blues had held 2-3 bp premium advantage a couple of months ago.  5/30 notched a new low of 43.1 bps.

Posted on March 21, 2018 at 5:20 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

March 20. ‘More speed and less capital’

–Subject line quote above is from a BBG article quoting GS.

“Future liquidity disruptions may amplify price declines when the current cycle turns,” wrote Charles Himmelberg, Goldman’s co-chief markets economist. “Trading liquidity may be worse than it looks because trading volume in many major markets is increasingly dominated by more speed and less capital.

Sounds like the stuff of flash crashes, doesn’t it?

–Yesterday’s session featured little change in interest rates with a bias lower as stocks tumbled.  FB pasted -6.8%.  SPX -1.4% and Nasdaq -1.8%.  The fact that interest rate futures have a hard time rallying in the face of asset price declines likely shows underlying bearishness, though it might just reflect concerns about a hawkish outcome at tomorrow’s FOMC.

–There was quite a bit of futures roll on the ED curve, related to the expiration of EDH8.  For example, at least 70k EDU8/Z8 bought from 13 to 14 which appears to be liquidation, both -14k in OI (14.0s).  Buyer of 100k EDH9/EDM9 at 11, appears roll with OI -48k and +42k (11.0s).   There continues to be heavy buying of 0EM 9700p for 3.5, settled 3.0 ref 9725.5.  OI +66k.

–Just to revisit the idea of capital, all sorts of major electronic trading programs are run to end the day ‘flat’.  It doesn’t take as much capital, as Goldman notes. It’s like the old-time concept of “just in time” inventory control.  On a broader level, I keep circling back to the idea of banking capital.  Plentiful in the US, but perhaps the underlying situation in europe is not quite as robust.  For example, DB continues to hover near the lows of €12.6.  It’s market cap is only 26.5 billion ($32b).  As a comparison, JPM has a market cap it $396b.  CS has mkt cap of 44b.  How can the namesake bank of the most powerful economy in Europe continue to flail around these levels?  Excess capital absorbs risk.  That is the lesson.  Excess capital equals central banks.  Does the Fed want to aggressively withdraw capital?

Posted on March 20, 2018 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

March 19. EDH8 off the board; rolling ED spreads at new lows

–Big event of the week is Powell’s first FOMC meeting as Chairman on Wednesday.  There are some concerns that FF projections will move somewhat higher, but there is no shortage of potential news stories that could be identified as market drivers over the next week.  For example, domestic political intrigue continues with speculation Trump could fire Mueller.  Trade tensions with China are still simmering “…as U.S. Treasury official David Malpass said he misspoke hours after claiming the U.S. was pulling out of decade-old formal economic talks with Beijing.” (BBG).  Mnuchin is still holding high level talks with the Chinese.  In other central banking news, China named Yi Gang as the new head of the Central Bank (US educated, pro-market reformer).  There  is some speculation that China wants to be more aggressive in dealing with bad debts and get the pain over with in the short term.  On the other hand, the ECB last week postponed implementation of rules for banks to deal with non-performing loans until 2021.  (Thanks Joe, for Armstrong link).

At that point it will probably fall into Weidmann’s lap.  The bigger theme here is that bad loans and malinvestment, which have lingered since the crisis or been exacerbated by low interest rates, are likely to be addressed in the next couple of years in one way or another by new central bank heads.  Probably not a benevolent environment for stocks.

–EDH8 expires today.  On Friday US rates moved higher, with tens +2.7 bps to 284.6.  Greens and blues were weakest on the dollar curve, closing -4.0.  New low in 5/30 at 43.7 bps.  With June’19 as the new first red, all rolling pack spreads will be at new lows.  Red/green marked at 9.375, green/blue at just 3.5 bps.  April treasury options expire Friday.  One looming question going forward is whether the curve will bull steepen on a hard stock sell off.  I think so, but Powell’s stance on Wednesday may provide clues as to how he might respond to asset drops.


Posted on March 19, 2018 at 6:32 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options


Last week I suggested supply and demand was about to become more important in the treasury market.  It’s a good topic, and would have been spot on if I had been talking about short term funding markets rather than longer dated treasuries.  Because that was really the story this week, the continued blow-up of Libor/OIS. A Bloomberg article noted the Fed asked about the widening in its most recent dealer survey. This piece continues, citing BAML, “Central bank would be ‘much more concerned’ about the rise in Libor if it reflected increased bank credit concerns rather than supply/demand dynamics at the front end of the rates curve.” Since EDH8 expires Monday, as good a reflection of widening as any is the spread of EDH8 to FFJ8, which settled 55.5.  This is out from a low of 41 earlier in the month.  On the forward curve, EDM8/FFN8 settled 47, EDU8/FFV8 39 and EDZ8/FFF9 at 38.5.  The cited culprits for this widening are repatriation flows and t-bill issuance.  Glancing at EEM (emerging market etf), there doesn’t seem to be undue pressure on emerging markets.  Recall that in 2015, EM stress forestalled the Fed from hiking in September; Yellen waited until December ‘15 for the first hike of the cycle.  In any case, we are seeing evidence of tightened financial conditions throughout the markets. The NY Fed considers short and long term rates, equities, the value of the dollar, and corporate spreads as indicators of stress.  All have signaled increased tightening.  Even though the curve has flattened, both short and long rates have increased. The dollar has steadied for now, stocks have lost a little air.  Many regional Fed banks have their own indicators, and they’ve turned up modestly.  I am just going to include a chart from the Chicago Fed.


Hard to see, but the black line, which represents Adjusted Nat’l Financial Conditions Index, is edging a bit higher.  What is sort of interesting is the orange part of the chart, which is the ‘adjustment’.  I’ve isolated that on the chart below.  When this moves into positive territory, as it is now, it seems to indicate problems ahead.  As I understand it from the Chicago Fed website, this adjustment seeks to put financial conditions in the context of general economic conditions. Probably worth noting.

Actually, real time economic data likely provides much the same sort of information.  For example, the deceleration in Retail Sales immediately caused downward revisions in Q1 GDP.  In the wake of the report, the Atlanta Fed Q1 estimate plunged from 2.5% to 1.9% and then down to 1.8% on Friday.  The NY Fed NowCast was also revised to a new low of 2.73%, having been 3.11% one month ago.

This week brings the FOMC.  I have seen a few analysts say that the Fed is going to lean hawkishly, and perhaps telegraph four hikes.  My only response is, ‘Why would anyone conclude that?’  Financial conditions are tightening.  The increase in libor funding rates has already had the same effect as an overt rate increase.  If one were inclined to forecast 4 hikes for the year, they’ve got it.  January 2019 FF contract trades 9784.0.  Given the current Fed effective of 1.42% and FFF9 indicating a rate of 2.16%, the difference of 74 bps indicates 3 hikes. Add in the 25 bp widening of libor/ois and, sure enough, there’s the 1%.  Inflation scares have slightly abated, given tameness in average hourly earnings.  However, I will note that the NY Fed’s Underlying Inflation Gauge (UIG) increased to 3% at last reading for January, which is the highest it’s been since prior to the crisis.  But the Fed is not so narrowly focused.

There is one other little technical note regarding the Fed Effective.  It has been as solid as a rock at 142 bps excluding month end, but ticked to 143 on Thursday.  April FF traded 9833 Friday, reflecting a fear that Friday’s Fed Eff could also tick higher.  Really, FFJ shouldn’t be trading 9833 and the fact that it is indicates another little technical wrinkle, of which we’ve seen many recently.

For example, there were deliveries into UXYH8 this month as the delivery option kicked in. The conversion factor is so low on the Cheapest-to-deliver that the post 2:00pm rally on 6-March when Cohn resigned created an option for the short to deliver and cover the additional long tails for a tidy sum.  I’ll also mention the EDZ9 9800 conversion that caused a local kerfuffle last week.  Traded 0.5 for call with futures level of 9800.  It had settled 1.75, which reflects the carry of 21 months, as the actual futures price was 9711.5.  The locals which sold at 0.5 weren’t (amazingly enough) incorporating higher yields over time in their market.  Is this trade of particular interest?  Not really, one local group picked off a couple of others.  The point is, this stuff doesn’t typically happen, and in a way, it’s GOOD.  It reintroduces the idea of RISK into financial dealings.  Perhaps it’s tied to the thought that central banks are taking a step back from the babysitter role. Higher rates  and dislocations make people think twice.  Well some, anyway.  A result should be higher option premia.  This environment makes people say, “Are you sure that’s there?”  Whenever I get that question, I say “Let me just double check,” because I’m not really sure of anything in this world.

Quick mention regarding the dollar.  It seems to be attempting to base, or at least it isn’t going down from here.  The lagged effect of USD weakness over the past year is one of the factors that should drive inflation readings higher.  But if US rates continue to rally, then shouldn’t the dollar turn higher?  Note that the yield spread between bunds and US tens is 227 bps, which is the high of the year and nearing the peak set in late 2016 of 235.  That particular spread hasn’t really had much influence on USD.  On the other hand, the yield difference between EDM8 and ERM8 has moved nearly 100 bps in six months.  From around 178 bps in September 2017 to 273.5 currently.  One would think this widening should support the USD, and, the prospect of increased pressure on the short end could provide a further push.  However, think of the converse for a second.  What if something happens that causes the US front end to rally?  Then USD may be subject to another hard leg down.


3/9/2018 3/16/2018 chg
UST 2Y 226.2 229.1 2.9
UST 5Y 265.2 264.3 -0.9
UST 10Y 289.7 284.6 -5.1
UST 30Y 315.0 308.0 -7.0
GERM 2Y -55.6 -59.1 -3.5
GERM 10Y 64.8 57.1 -7.7
JPN 30Y 76.3 75.3 -1.0
EURO$ Z8/Z9 36.5 34.5 -2.0
EURO$ Z9/Z0 7.0 6.0 -1.0
EUR 123.07 122.91 -0.16
CRUDE (1st cont) 61.92 62.41 0.49
SPX 2786.57 2752.01 -34.56
VIX 14.64 15.80 1.16

Posted on March 18, 2018 at 1:00 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

March 16, 2018. They’re dying the Chicago River Green tomorrow – does that mean we buy greens?

–Going into the expiration of EDH8 the pressure continues, with new lows in EDH8 yesterday of 9778.75.  However, EDM8 did not make a new low, and was 9769 bid late.  After the libor setting came out at 2.1775 there was a buyer of at least 50k EDH8 9775p for 0.25.  There was also buying of 20k EDJ 9762p for 1.75 and of EDK 9750p for 0.75 (both settled at those prices ref 9770.0).  While lib/ois rallied out to new high, the 2 year swap spread fell a couple of bps from 32.4 to 30.1.  The curve continued to flatten.  Late mark in 2/10 was 54 bps, -1.5.  The low set on Jan-4 was 49.7.  5/30 was 43.5 late, the low of the year was 41.9 on Jan 31.

–I got a good question yesterday: what part of the curve rallies hardest If a catalyst sparks a rally.  Perhaps it depends on the catalyst.  I would say the first two greens, i.e. EDM0 and EDU0.  In treasuries I would reckon the 5yr, as  5/10 spread is barely above 20.

–Housing Starts and Industrial Production today with the latter expected +0.4.  JOLTS as well, but there’s little concern about the labor mkt at this point.

–FOMC meeting is Wednesday.  Dots are expected to go up.

–The one-year euro$ spreads are becoming completely flat.  Late marks: EDH8/H9 41.0, EDM8/M9 41.5 and EDU8/U9 39.0.  EDZ8/Z9 settled 33.5, so there’s still some positive roll there.   Back end of the curve is is flat as it can get without inverting.  Green/blue settled 3.875 and blue/gold 3.25.  New lows.  Also at a new low is EDZ9/EDZ1 at 8.5.  Interestingly, even with curve flattening implied vol firmed significantly.  Although the tightening at next week’s FOMC is fully priced, the market feels as if it’s gearing up for a big move.  March Midcurves expire today.

Posted on March 16, 2018 at 5:20 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

March 15, 2018. Let the Good Times ….flatten?

–Yields declined and stocks faltered as Retail Sales fell, -0.1%.  This data caused several analysts to mark down estimates of Q1 growth.  Notably, the Atlanta Fed GDP Now projection plunged to 1.9% from 2.5% on 9-March.  The first quarter has printed weak several times in recent years, but given the tax package it’s surprising.  The idea of tax cuts sparking sustainable ‘animal spirits’ is becoming questionable, perhaps reflected in the PA election as well (narrowly claimed by the Democrat candidate).  Midterm elections were to be dominated by the feel-good effects of tax legislation; are the benefits already fading?

–Tens fell 2.8 bps to 281.3.  The curve flattened to new recent lows.  2/10 fell to 55.5 bps and 5/30 dropped over 4 bps to close below 45.  Red/gold pack spread eased slightly to a new low of 23.  There was a buyer of about 50k FVJ 114.5 calls for 6.5 to 7.0 with FVM trading 114-04 to 04.5.  This call settled 6 ref 114-06 as others took advantage of the vol pop to sell lower strike calls on curve trades.  April options expire one week from Friday.  Previously this call buyer anticipated the large stock sell-off which caused a flight to the belly.

–Also of note were a few synthetic buys of EDZ9.  Again, this is the contract with peak open interest of 2.27m contracts.  First, there was a seller of 20k EDZ9 9700/9650 put spread at 14.5 (24d) which appears to be a roll down into the lower strike.  The following trade is also of interest: +45k 0EZ 9750c vs -30k 3EZ 9725c for a credit of 4 to 4.5 bps.  Settles were 9.75 (27d) and 16.75 (38d).  3EZ settled at a credit of 4.25.  Trade is slightly long the market, and a synthetic steepener.  A similar trade was done in June contracts.  What’s interesting here is that this trade can quickly morph into a short position if the curve implodes on a rally.  The difference between strikes is 25 bps, but the actual spread over the two years from EDZ19 to EDZ21 is just 10 bps! (9715 to 9705).  EDZ8/EDZ9 closed -1.5 at 32.5.

–News today includes Philly Fed, expected 23 from 25.8.  Also, TIC data is released this afternoon, perhaps of more interest than usual due to possible trade frictions. On a tangent, the US is claiming steel and aluminum production as vital to national security, while the Chinese are securing uranium and cobalt (Glencore agrees to sell 1/3rd of cobalt production to China).  The relevance of various minerals and metals may become a larger topic going forward.

Posted on March 15, 2018 at 5:25 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

March 14. Deflating curve, vol and activity

–CPI was as expected with yoy Core +1.8 and headline +2.2 yoy. Retail Sales expected +0.3 and PPI expected +0.1 headline, and +0.2 Core with yoy Core 2.6.
–Yields eased with a solid 30 year auction, though the biggest piece of news came on the political front with the ouster of Rex Tillerson, which took the wind out of stocks. Vol deflated after the data and the curve flattened. I marked 2/10 at a new low of 58.3 and 5/30 at a new low of 47.7. Red/gold is closing in on 23 bps, and as mentioned yesterday, will likely print a new low for the year as March rolls off the board Monday. The June19 1 yr avg is 9716.625 and the June22 1 yr is 9698.75 so that spread is now just 17.875. As mentioned over the weekend 2EM and 2EU straddles hadn’t declined at all for 5 weeks going into Friday 5-March, ending at 33.5 and 43.5. The market is now catching up, with 2EM 9712^ at 29.0 and 2EU 9712^ 40.5. Likely to see further pressure.
–Front end continues to trade with an anvil around its neck. A March hike is completely priced, but dot projections next week will be of interest. Front end weakness is one factor pressuring the curve, but other issues are also at play. Interesting note on BBG mentions that not a single Japanese ten year traded Tuesday. From the article: “Governor Haruhiko Kuroda noted to lawmakers Wednesday that the central bank has bought 75 percent of the government bonds issued in the fiscal year ending this month.”

Posted on March 14, 2018 at 5:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

March 13, 2018. Front end weakness persists approaching EDH8 expiry

–Treasury supply was absorbed fairly easily with TYM trading a tight range around 120-03 both before and after the auction (Settled 120-06+).  Yield was 2.889 with 2.5 bid to cover.  Prior to the auction 20k TYJ 120 puts were sold covered 120-03, at 20.  So 46 in the straddle, which settled 45.  Puts were an exit. Thirty year bond vol was crushed, with USM closing at 7.5, a bit surprising in front of today’s inflation data and auction.  (New sales of USM 141p in 6k, closed 0’56 ref 143-23).

–Today’s news includes CPI expected +0.2 both headline and core.  Core yoy is expected +1.8, same as last, with headline +2.2.

–On the short end the main feature was continued widening of fra/ois spread.  As a proxy the spread EDH8 to FFJ8 closed at 50 (+1.25), having pulled back to 41 earlier in the month.  Further out the curve these spreads also made new highs:  EDM8/FFN8 settled 42.5, having been 35.5 in early March.  EDU8/FFV8 closed 36.5, not quite a new high, and EDZ8/FFF9 closed 37.  This latter spread hit 40.5 in late Feb, pulled back to 32.0 on March 2, and has since rebounded.

–Front end weakness on the dollar curve has contributed to curve flattening.  Red/gold euro$ pack spread ended 24.625, a new recent low and close to the absolute low of 19.25 set in the beginning of January.  As March contracts expire on Monday, this spread could easily print new lows on a rolling basis, as EDH19/EDM19 settled 10.5 while EDH22/EDM22 is only 0.5. (Currently the M19 1y pack avg is 9816.5, and the 1y M22 avg is 96.975, a spread of 19.0).   Does it make a difference?  A flat or inverted curve is often associated with recession.  The market already has three hikes fully priced this year with FFF9 printing 9783.5 or 2.165%, 74.5 bps above the current Fed effective of 1.42%.  The Fed ‘dot’ projections may take on added importance at next week’s FOMC, especially for 2019 and beyond.  The issues going forward are whether the fra/ois spread will revert lower again, and whether the next step-up in QT will start to bite (another $10 billion/month will roll off starting April, $6B treasury and $4b MBS).  I believe the new rate is $30b month in total.

(Below charts, top is red/gold ED pack spread and underneath is Bond Vol).


Posted on March 13, 2018 at 5:22 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

March 12. Auctions and inflation this week.

–Three and ten year notes auctioned today. CPI tomorrow, followed by the thirty year bond auction.  Auctions are more important than usual as the market tries to gauge global demand in the face of increased supply.

–NFP of 313k Friday was coupled with a yoy increase of only 2.6% in Average Hourly Earnings, with the previous number revised lower to 2.8 from 2.9.  Yields ended modestly higher, with tens +2.8 bps to 289.2.  On the euro$ strip, greens were weakest on the board, closing -3.375.  Good buying Friday of EDZ8/EDZ9 at 37.0; settled +2 at 36.5.  EDZ9 has the most open interest of any contract at 2.175m, having doubled since the beginning of the year.  While near calendar spreads rose, the back end of the curve remains flat.  For example, greens to blues (3rd to 4th year spreads) settled at a new low of just 5.375 bps.  Lack of inflationary pressures (as reflected in subdued wage growth) is helping to keep the back end compressed.  At the same time, growth is continuing, with the Atlanta Fed GDP Now at 2.5% for Q1 and the NY Fed at 2.83%.  This recipe of moderate growth and low inflation diminishes risks of a more aggressive Fed in the future, and supports equities.  In the short term, next week’s FOMC meeting is fully priced for a hike, and June is 75% of the way there, with July FF at 9814.5 (9808.5 represents 100%), and FFK/FFN settled 18.5.  Nasdaq soared to a new high on Friday.

–BIS says Canada and China at risk of banking problems, but China has been taking steps to deleverage.

–March euro$ midcurve expire Friday.  Auctions and inflation data out this week.  0EH9 9737.5^ settled 6.0, 2EH0 9712.5^ 8.5, 3EH1 9700^ 8.0 and 4EH2 9700^ 7.5.

Posted on March 12, 2018 at 5:22 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Supply and Demand. Boring until it’s not. March 11, 2018

In the treasury market, I’ve never really bought into the idea of ‘supply and demand’ as a driving factor.  After all, we’ve previously been in periods of increased deficits (more supply) that don’t seem to impact rates much at all.  I suppose one would argue that other factors were increasing demand at the same time, for example, perceptions of lower future growth.  During episodes of QE, increased demand by central banks actually seemed to have more of an impact on stocks than bonds; stocks typically went higher and bonds edged lower.  One might conclude that simplistic concepts of supply and demand have little to do with yields; influences are much more nuanced and intertwined.  For example, deficits and supply often go up during economic downturns, but the same macro picture also leads to lower rates and demand for fixed income.

Currently we are in a period of rising rates, engineered by both Federal Reserve normalization policy, and increased supply driven by swelling deficits.  There are many technical divergences that might suggest yields have pushed too high and are due for a substantial retracement.  I’ll mention three.

First, the top chart indicates a break in the relationship of $/yen and the ten year yield, with the former moving lower and the latter pressing higher, a stark change since late 2017.  Do we necessarily get ‘reversion to the mean’?  This divergence might simply signal the idea that Japan may be moving towards the stimulus exit door leading to a stronger yen and less fixed income buying globally.  If so, the reversion trade may easily transform into revulsion.

A second, though less glaring divergence concerns a relationship popularized by Jeffrey Gundlach of Doubleline.  His arsenal of indicators includes the ratio of copper to gold versus the ten year yield.  Makes sense, copper is related to economic activity and gold is a ‘store of value/flight to quality’, so as this ratio goes up it would generally correlate to ten year yields.  The chart is below.  The copper gold ratio peaked right at the end of 2017, but yields have continued to move higher.

Third, I consider the Commitment of Traders (COT) reports.  I don’t personally weight this data heavily, because I think it’s a lot more valuable for commodities than financials, but I’ve cherry-picked a chart to include here anyway.  The white line is the non-commercial (spec) net position, a record short in the Ultra Bond.  The amber line is the continuous front ultra bond contract (WN1).  Specs are hugely short.  Does that necessarily lead to a rally?  Dunno. **By the way, the chart is mis-labeled, Amber is the color of the futures price.**

Looking at these three indicators, one might determine that the rise in yields has gone too far.   Reviewing the historical record, one could further support the above conclusion.  For example, many commentators have compared the current environment to 1987.  Mostly, they are talking about stocks, noting that the market rallied even in the face of rising rates, but then crashed.  Here, I will just focus on the ten year yield. In early 1987, the ten year had bottomed just above 7%.  The Fed was tightening, and the yield peaked in Sept 1987 just above 9.4%.  Cumulative move was 240 bps, an increase in yield of about 35%. Yields then fell of course, in the aftermath of the crash. [Using data from St Louis Fed].

There was another notable rate increase in 1993/1994.  In 1993 the Fed left the overnight rate at the then historic low of 3% for over a year.   In 1994, an aggressive hiking schedule commenced.  The ten year yield bottomed at 5.7% in Sept 1993 and topped just under 8% in Nov 1994.  Cumulative move 230 bps, an increase of around 40%.

The tightening associated with 2004-2006 was much more drawn out.  The ten year yield bottomed at 3.3% in June 2003 and topped at 5.1% in 2006, for a total of 180 bps, an increase of about 54%.

In the current cycle, the low yield associated with Brexit was just under 1.5%.  The yield has just about doubled, closing on Friday at 2.89%.  Shall we focus on the cumulative change of 140 bps and figure there’s another 100 bps to go in order to reach the 240 bp rise of 1987?  Or do we say that a doubling of rates in an environment of huge debts is already punishingly overdone?  By the way, this move is more or less a replay of 2012 to 2013, when the yield rose nearly 140 bps from August 2012, (1.68%) to the end of 2013, around 3%.

In the very short term, the Treasury auctions 3 and 10 year notes on Monday, followed by the 30 year bond on Tuesday.  Given the resignation of Gary Cohn and an increase in protectionism, there is some concern that Asia might go on a buyers strike.  If I were China, I would make a point by selling reserves this week.  In the very short term, supply and demand takes on heightened importance.  Also this week, CPI is released Tuesday with yoy Core expected 1.8%, same as last month.  Retail Sales and PPI on Wednesday with PPI yoy Core expected +2.6%.

In the final analysis, yields are driven more by macroeconomic factors than treasury supply.  We are in an environment where macro factors are lining up with supply considerations to produce a bearish outlook on both counts in spite of short term technicals.  Friday’s strong nonfarm payroll increase of 313k didn’t spark a large sell-off because the market is already short, and was looking for confirmation of wage pressure with Average Hourly Earnings growth.  YoY AHE was only +2.6%, a deceleration relative to last month’s 2.8% rate, so weaker shorts pared positions.

In conclusion, while there are several technical indicators that portend a short squeeze, I think inflationary concerns coupled with QT will dominate, and yields will continue to press higher.  As an aside, while we know that demographics and debt where of a much different composition, I’ll bet the generation of 60 years ago, with an identical ten year yield of 2.9% in 1958, could scarcely have imagined the bond bear they were about to experience, culminating in a yield over 15% in 1981.


It was a pretty big week for calendar spreads in Eurodollars.  Near term spreads continued to press higher, but the back end of the curve compressed.  As an example, EDZ8/EDZ9 spread rose 4 bps to 36.5, while EDZ9/EDZ0 fell 1.5 to 7.0.  As mentioned, EDZ9 has become the elephant in the room, with open interest of 2.175 million.  Since the start of 2018, the open interest in this contract has more than doubled! Heavy buying in EDU8/EDH9 spread from 24 to 25, settled 25.5. (This appears to be a roll of shorts to EDH9).  Also heavy buying in EDM8/EDZ9 and EDZ8/EDZ9.  The short in EDZ9 appears to be in strong hands.  The peak one-yr spread is EDH8/H9 at 48.25.  EDH8 expires in one week; EDM8/M9 is 47.0.

Over the previous 5 weeks, green midcurve straddles have not declined in premium at all.  (Thanks for pointing that out BC).  For example, On Feb 2, 2EM 9712.5^ settled 33.5 vs 9715.5 and on March 2 it settled 33.5 vs 9717.0.  No time decay. On Friday, 2EM 9712.5^ settled 30.5 vs 9708.  The long dated EDM20 straddle actually rose over the time period: 70.0 on Feb 2, 73.25 on March 2, and 76.25 on Friday!



3/2/2018 3/9/2018 chg
UST 2Y 223.4 226.2 2.8
UST 5Y 262.0 265.2 3.2
UST 10Y 285.3 289.2 3.9
UST 30Y 312.6 315.9 3.3
GERM 2Y -55.2 -55.6 -0.4
GERM 10Y 65.1 64.8 -0.3
JPN 30Y 75.8 76.3 0.5
EURO$ Z8/Z9 32.5 36.5 4.0
EURO$ Z9/Z0 8.5 7.0 -1.5
EUR 123.21 123.07 -0.14
CRUDE (1st cont) 61.25 62.04 0.79
SPX 2691.25 2786.57 95.32
VIX 19.59 14.64 -4.95


Note: One ED one-year spreads I switched to Dec contracts as they have the largest volume and open interest

Posted on March 11, 2018 at 12:32 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options