Rate vol surges

June 14, 2019

–Amazing bid to vol Thursday.  The chart below shows how treasury vol has exploded as compared to VIX.  While one can point to tanker attacks in the Gulf of Oman and Sec’y of State Pompeo naming Iran as the culprit later in the day, stocks took that information in stride.  However, interest rate futures surged again yesterday.  The ten year yield fell 3.7 bps to 2.089%, but EDZ19 thru EDU20 were up 8 bps.  Going into next week’s FOMC, easing expectations are being front-loaded, which of course, steepens the curve.  New high yesterday in 5/30 to 77.3 bps.  Ten year note to inflation-indexed breakeven dipped to a new low under 170 bps.

–Several shops are (mistakenly) calling for a rate cut next week.  Both July/Aug FF and Aug/Oct FF spreads settled at new lows of -20.5.  FFV9 on its own posted a new high settle of 9809.5, a level that’s 46.5 bps below the current Fed Effective.  I.e. two cuts are priced by September.  I can easily see a Fed pass next week and 50 to follow in July. 

–A couple of examples of the vol move: On Wednesday,  EDU0 9837^ settled 66.5 vs 9831.5, and yesterday settled 70.0 vs 9839.5.  USU 154 straddle settled 3’54 Wednesday (153-19) and 4’10 yesterday (154-08).  Perhaps these moves are partially due to the possibility of a surprise cut next week, which would also support stocks and therefore suppress VIX.  What happens if there’s no cut and a slightly hawkish presser?  July VIX futures closed at 17, a pretty good hedge as geopolitical factors are starting to boil over.  By the way, gold is also at a new high this morning, having rallied $80/oz since late May. 

–Retail Sales today, expected +0.6.  Industrial Production expected +0.2%.

White line TY vol / Amber is VIX
Posted on June 14, 2019 at 5:10 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

They ALWAYS buy when the Blues win the Stanley Cup

June 13, 2019

–Crude oil bouncing this morning after plunging over $2/bbl yesterday to settle 5114 near a new low.  I guess that’s good.  Except that the catalyst was an alleged attack on tankers in the Gulf of Oman.  In any case, stocks have also seen buying and rate futures are higher this morning.

–CPI yesterday was slightly lower than expected with yoy Core +2.0.  The ten year auction was well received even though the yield at 2.13 was 35 bps below last month’s  2.479%.   30 year bond auction today.  USU9 was unch’d at the close yesterday at 153-19 even though shorter dates rallied.  At last month’s auction the yield was 2.892, now it’s 2.62.  News that the US gov’t spent more than $3T over the first 8 months of the fiscal year and ran a deficit of $739B doesn’t seem to affect demand for claims on the US taxpayer, because, of course, we’re taking in tariff money.  Right?

–The curve steepened with the euro$ strip rising 2 to 5 bps in price.  Interestingly, odds for an ease in July are now higher than those for the Sept FOMC.  July/Aug FF spread closed -19.5 while Aug/Oct closed -17.0.  We’re in a world of ultimatums.  Trump has said tariffs will go up on China if Xi doesn’t meet, and the market is telling the Fed it MUST ease in July.  Large trades yesterday include buying of October 9825/9850 call spread and call 2×3 for 6.0.  Settles were 8.25 and 3.5 (so 6.0 in 2×3).  A while ago there had been large buying in Oct 9800/9825 call spread for 2.5 to 3.0. I thought the buying of the 9825 strike was a roll up, but open interest in both calls gained, 38k and 52k.  EDZ9 settled +3.5 at 9799.0.    

–I can’t recall where I saw this yesterday, but the ratio of small cap Russell to large cap SPX is near the low of 2016 and not all that far from the lows set in the crisis.  I have re-created the chart below.  That’s probably NOT a sign of solid organic growth in the US economy.

 

Posted on June 13, 2019 at 5:11 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Markets keep pushing the ease

June 12, 2019

–Markets are starting the day on their back foot with oil -160 at 51.67 (CLN9) and stocks lower.  Rate futures are higher going into today’s CPI data and ten year auction.  While the ten year yield was essentially unchanged yesterday at 2.138%, the eurodollar strip flattened, with EDU9 and EDZ9 the weakest at -3.0 bps, while reds were +0.75, greens +3.125 and blues +4.0.  EDU9 will become the front contract next week and settled 9784.5 vs EDM9 at 9755.5 (spread of -29.0).  Obviously there’s a cut priced.  The Fed Fund settles reveal an interesting change in terms of ease timing:  the July/August spread settled -18.0, while August/Oct settled -17.5.  In other words, odds of an ease at the July 31 meeting are now higher (by a smidgen) than the Sept 18 FOMC.  It’s been a long time since the Fed moved at an off-quarterly meeting. 

–The big trade of yesterday was a new buy of 100k 0EQ 9862/9887c spd versus 9826 in EDU0 for 3 bps.  The high in EDU0 so far is 9850.  EDU9/EDU0 settled -42 yesterday, but had been as low as -55.5 at the start of the month (M9/M0 low has been -79.75) .  Could the market price 100 bps of rate cuts from September forward?  This call spread indicates that possibility…

–The US says it is planning for a meeting between Trump and Xi later this month but it’s unclear if that’s actually happening.  Protests in Hong Kong are getting a lot of press; it seems as if the issues are becoming larger than just trade. In Europe, Villeroy says the ECB could expand stimulus as ERZ9/ERZ0 slips into inverted territory, trading -0.5/0.0  this morning.

–Notwithstanding a grain report yesterday that saw Corn jump 15 cents, longer term charts of the CRB and BBG commodity indexes are ugly. (Pictured below).  *All Central Banks, All the Time* doesn’t seem to be doing much for the prices of real things…

Posted on June 12, 2019 at 4:59 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Bizarro Markets

June 9, 2019 – Weekly Comment

Last week I started with this line, “This week, the markets eased.”  In the week just ended, the trend continued, but the ease was pulled forward in time.  The most glaring example can be seen in the July’19/August’19 Fed Fund spread which closed at -20 on Friday from -10 on the previous Friday.  The settle indicates 80% odds of a 25 bp cut at the July 31 FOMC meeting, up from 40%.  August FF alone settled 97.88 or 2.12%, versus Fed Effective of 2.37 to 2.40%.  In other words, by August the market is pricing CERTAINTY of at least a 25 bp cut.  By my calculations, an ease at next week’s FOMC is being priced at about 1 in 3 (FFM9 settled 97.6425).

The week before last JP Morgan revised their call from balanced odds between a hike and ease to a forecast of cuts in September and December.  Last week Barclay’s vaulted ahead, calling for a 50 bp ease in July, followed by another quarter in September.  Citi is looking for a cut of 50 in September.  Kashkari is now thinking a HIKE is in order (just kidding).  The change in sentiment over the past couple of weeks is simply astounding.  This week, inflation data in the form of PPI and CPI are released on Tuesday and Wednesday.  Below is a chart of yoy Core data.  Do the modest drops in inflation, consistently referred to as “transitory” by Fed officials, warrant full-on monetary easing with conventional and unconventional tools?

Let me just note a couple of other prices.  EDM9/EDU9 settled at a new low of -33.25 with June expiration just one week away.  The German bund yield closed at -25.7, a new historic low.  EDZ9/EDZ0 actually rallied 13.5 bps on the week to -27.0, as the market moved up the timing for aggressive easing by the Fed.  In short sterling, Dec’19/Dec’20 settled at a new low of NEGATIVE 8, while Dec’19/Dec’20 euribor settled 0 (with ERU9/ERU0 -4.5).  The dollar index fell to a two month low, closing on the 200 day moving average at 96.56.  The US two year note fell nearly 10 bps on the week, but 30’s shaved only 1 bp.  Stocks soared, with SPX just 2.7% from all time highs.  Except in China, where the Shanghai Comp eked out its lowest close since late February, even though the PBOC said there’s “tremendous room” to adjust monetary policy.  Gold has rallied eight sessions in a row.  The world demands lower rates.

This is bizarro price action. 

From Wikipedia:

The Bizarro World (also known as Htrae, which is “Earth” spelled backwards) is a fictional planet appearing in American comic books published by DC Comics. Introduced in the early 1960s, htraE is a cube-shaped planet, home to Bizarro and companions, all of whom were initially Bizarro versions of Superman, Lois Lane and their children…

In the Bizarro world of “Htrae”, society is ruled by the Bizarro Code which states “Us do opposite of all Earthly things! Us hate beauty! Us love ugliness! Is big crime to make anything perfect on Bizarro World!” In one episode, for example, a salesman is doing a brisk trade selling Bizarro bonds: “Guaranteed to lose money for you”.

Of course, Bizarro World was more recently made famous by a Seinfeld episode citing Bizarro Superman, the exact opposite of Superman, who lives in the backwards bizarro world. “Up is down, down is up. He says hello when he leaves and good-bye when he arrives”.  This episode also  featured “Man hands”.  Back in the day, there was a striking clerk working for (of course) FO, who was known as man-hands.  But that’s a different bizarre story for a different time.    

In today’s environment, “Us buy stocks when yields are forecasting an economic catastrophe.”  “Us cut rates when data strong.” “Us buy bonds that are guaranteed to lose value”.  The ten year bund at -25 bps?  By the way, the US Treasury is raising $54 billion of new cash this week by selling $38Bb in 3 year notes, $24b in tens and $16b in thirties.   With the ten year yield having fallen over 70 bps from this year’s high, of which 30 bps was in the past three weeks, what kind of demand will there be for fresh supply?  Especially when considering that a slowing economy will make deficits even WORSE, leading to greater supply.  “Smithers, how in the world could you bid for 30’s at these yields?!?  You’ve blown up our portfolio.” Smithers’ reply “Well, I was able to get a 20 bp yield pick-up over Italian tens.” 

The question becomes, why is the market pushing so aggressively for an ease in policy, even with relatively buoyant asset prices and economic data which feature the lowest unemployment rate in fifty years?  Is it because of the slowdown in global trade, as Powell alluded to on Monday?  Or is it something much more pernicious indicating risks in global financial stability?  If it’s the latter it’s not showing up in corporate spreads.  HYG and JNK hi-yield ETFs are right back where they were last fall prior to the 4th quarter sell-off. 

The question becomes whether the central bank should accommodate what has been a political decision on trade made by the President.  According to the dual mandates of full employment and steady inflation, the Fed has done a pretty good job, as Fed officials constantly remind us.  On Wednesday, El-Erian published an article with the following question: “Would such [rate] cuts even lead to sustainably and substantially higher consumption and investment; and, if not, how long can markets maintain increasingly elevated asset prices that are decoupled from the underlying economic and corporate fundamentals?” (emphasis added).  If the markets successfully push the Fed into aggressive accommodation, Powell will be seen as completely folding to Trump.  I simply can’t see how that would be anything but a huge curve steepener.     

European bank shares are generally at or below the lows seen at the end of last year. China’s financial system is coming under further scrutiny with the recent state takeover of Baoshang Bank and weakness in yuan, which increasingly looks like a test of 7 is nearing.  The old CME floor local lament, whenever big trades came in that turned the flow of the market is:  “What do these guys know?  They know SOMETHING.”  Maybe it’s not the domestic situation, perhaps markets are sensing that it’s the global financial architecture that is nearing a breaking point, exacerbated in part by a strong dollar.  In that case, this week’s decline in DXY is welcomed. 

Just as a historical sidenote, in August of 1987 SPX was at a new all time high.  It pulled back into September, but made a new run at the highs in early October, getting within 2% of the top.  On Saturday, October 17, Treasury Sec’y James Baker III told the Germans to “either inflate your mark, or we’ll devalue the dollar.”  On October 19, SPX lost 20.5%.

Sometimes trade tensions lead to a breaking point. In that light, the month end G20 meeting takes on added importance.

Hello.

5/31/2019 6/7/2019 chg
UST 2Y 194.4 184.7 -9.7
UST 5Y 192.9 185.0 -7.9
UST 10Y 214.2 208.4 -5.8
UST 30Y 258.2 257.2 -1.0
GERM 2Y -65.9 -67.0 -1.1
GERM 10Y -20.2 -25.7 -5.5
JPN 30Y 45.4 37.9 -7.5
EURO$ Z9/Z0 -40.5 -27.0 13.5
EURO$ Z0/Z1 8.5 7.5 -1.0
EUR 111.71 113.35 1.64
CRUDE (1st cont) 53.50 53.99 0.49
SPX 2752.06 2873.34 121.28
VIX 18.71 16.30 -2.41

https://www.nasdaq.com/article/lessons-from-the-1987-market-crash-cm41661

Posted on June 9, 2019 at 8:13 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Carnage in short rate options

June 6, 2019

–The extraordinary rally in euodollars continues.  In a little over a month, since early May, many contracts have rallied 55 to 70 bps, without an overt ease from the Fed and without any substantial catalyst.  ISM data remains above 50, with yesterday’s services posting a solid 61.2.  There has been no banking crisis.  Corporate spreads aren’t exploding.  No panic in stocks.  Yet, EDH0 was 9857.5 in early May and now prints 9826.5, a rally of 69 bps.   FFF0 has surged from 9775.5 in the beginning of May to 9831 now, a gain of 55.5.  And remember, at 9775, the market was ALREADY projecting better than 50/50 odds of an ease by year-end.  This contract printed 9836.5 yesterday, pricing three 25 bp cuts by year end.  Trump may not know it from stocks, but interest rate markets are in the process of exerting severe pressure to make a China deal.  Or, perhaps that’s the wrong interpretation….perhaps the market just wants inflation at any cost, and perceives the correct path to be slashing funding costs. Crude oil has not cooperated, falling nearly 20% since the start of May.  I’m becoming so bearish on the long bond that my only choice is to avert my gaze.   

–All back eurodollar spreads are now making new highs (from reds back).  Red/gold pack spread closed at 43 yesterday, +2.75, a rally of close to 25 bps since the beginning of May.  Eurodollar option volume has been heavy.  However, several option market making groups have apparently stopped doing business due to the carnage.  The liquidity of 1/4 bp markets that was taken for granted is not likely to be available in the near future.   There has continued to be large buying of call spreads, for example, EDN 9800/9812cs settled 3.0 yesterday, trading over 100k with open interest increasing by nearly 70k in each strike.  I find these levels ludicrous.  However, if the first “insurance” cut occurs at the June FOMC, then anything’s possible.  

–Employment data tomorrow following weak ADP of only 27k yesterday.

Posted on June 6, 2019 at 5:20 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

JAN 2020 Fed Funds

FFF0 now print new high 9836.  It has rallied 50 bps just since May 21.

It’s 74 bps lower in yield than current Fed Eff of 2.38.  THREE EASES BY END OF YEAR PRICED.

Posted on June 5, 2019 at 7:53 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Aggressive ease pricing sees a pause

June 5, 2019

–Having aggressively priced Fed easing over the past several sessions, interest rate futures pulled back yesterday.  The ten year yield rose 4 bps to 2.12%.  Green euro$ pack fell 5.5 bps (weakest on the strip).  However, October Fed Funds closed +2 on the day at 9801.0 or 1.99%, around 40 bps below the current Fed Effective.  If there is only one ease by September this contract will decline about 15 bps.  The press is pointing to Powell’s “act as appropriate” comments yesterday as providing support for stocks; the Fed is closer to an actual ease.  Powell mentioned trade negotiations, which will, of course, be the excuse for the coming rate cuts.   Obviously, shipping volumes have declined, starkly apparent in the share price of FedEx.  This stock made a high in early 2018 of 270 and closed out the year at 160.  It neared 200 in April of this year, but has revisited last years low since then, though it had a solid bounce yesterday, closing at 160.  Bear in mind that last year’s low in SPX was sub-2400 vs 2800 now.

–EDZ9 closed at 9802.5.  This contract is also reflecting several rate cuts by year end.  Large new buyer of 100k EDZ9 9762p yesterday, settled 5.25 ref 9802.5.  I’d be more inclined to sell that level with a delta hedge in FFV9.  

–Interesting comment on leveraged loan risk by CEO of BofA Moynihan “It’ll be ugly for these companies if the economy slows down and they can’t carry the debt and then restructure it, and then the usual carnage goes on.”  There hasn’t been much in the way of ‘usual carnage’ for a while. but the first part of that recipe, the slowing economy, is already occurring. 

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

US 10Y yield at lowest since Trump was elected

June 4, 2019

–Now THAT was a proper rally.   The strongest eurodollar contracts moved forward on the curve with EDZ9 and EDH0 leading, up 13.5 on the day.  Credit Suisse was out early with a note saying the first ease might be in July, and Bullard followed, saying a cut might be warranted due to trade issues and low inflation.   Powell speaks this morning on policy strategy; he’ll likely hint about a more rapid end to the taper.  The 2-yr note plunged 10.2 bps to 1.842%, with tens down 6.2 to 2.08%.  The 2/10 spread closed at a new recent high of 23.8 bps.

–So what do you do with the dot plot?  At the March FOMC, the projected FF rate for the end of 2019 was 2.4%.  That was down from 2.9% in December.  The 2020 projection was 2.6%, down from 3.1% in December.  Yesterday, EDZ19 settled 98.04 and January 2020 Fed Funds settled 98.275, rates of 1.96% and 1.725%.  The June FOMC is a bit over two weeks away.  Should the dots drop ANOTHER 50 bps to try to line up with the market? 

–All ED calendar spreads from EDZ19 forward rallied.  Red/gold pack spread gained another 8 bps to close at a new recent high of 40.75 bps (reds +11.5, greens +9.625, blues +6.625, golds +3.5).  The metal gold has also surged as markets search for safety.   October Fed Funds settled 9799 or 2.01%, about 40 bps lower than the current Fed Effective.  Chance that the first ease is 50?  (Oct funds cover June, July and Sept FOMC meetings).  Call ratio spreads which essentially reflect the view that markets can rally slowly but are unlikely to surpass upper strikes, have blown up spectacularly.  It’s hard to get this type of violent move without the fuel of forced buying.  However, the back end of the market isn’t experiencing the same vol surge.  Example, 0EZ atm 9837.5 straddle settled 51, ten bps more than 3EZ atm 9812.5 straddle at 41.0.

–As the chart below shows, the ten year is at the lowest yield since President Donald Trump was elected.  Do lower long term rates save the economic environment when tech stocks are under regulatory attack and global trade is declining? 

Posted on June 4, 2019 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

EASE. Or we’ll do it for you

June 2, 2019. – Weekly comment

This week, the markets eased.  The two year note fell just over 21 bps to yield 1.944.  October Fed funds, which is the contract just after the September FOMC, settled 97.885 or 2.115% against the current Fed Effective rate of 2.38%, a spread of 26.5.  The market has fully priced one cut by the September FOMC.  January 2020 Fed funds settled 98.145 or 1.855%, 52.5 bps below the current Fed Effective.  So there are two cuts priced by the end of the year.  Volumes were huge, implied vol exploded; the market likely got a bit ahead of itself.  However, the message the eurodollar curve has been sending for months is crystal clear: we expect rate cuts.  That sentiment was punctuated at the end of the week/month as the red euro$ pack (2nd year forward) closed up 14.5 bps on Friday alone at a price of 98.29375.  That, by the way, is over 75 bps lower in yield than EDM’19 at 97.53, which will expire in two weeks.  The Great Oz has spoken.

This is what Oz said to Scarecrow who was in search of a brain:

“Why, anybody can have a brain. That’s a very mediocre commodity. Every pusillanimous creature that crawls on the Earth or slinks through slimy seas has a brain.  Back where I come from, we have universities, seats of great learning, where men go to become great thinkers.  And when they come out, they think deep thoughts and with no more brains than you have.  But they have one thing you haven’t got: a diploma.”

On Friday these headlines came across:
*J.P. MORGAN SAYS IT NOW SEES FED CUTTING RATES IN SEPTEMBER AND DECEMBER
*J.P. MORGAN PREVIOUSLY SAID IT SAW RISKS OF FED’S NEXT MOVE “AS ABOUT EVENLY DISTRIBUTED” BETWEEN A RATE HIKE AND A RATE CUT

And, within a couple of minutes, this comment on bbg IM from a large eurodollar player: “These Harvard educated economists are geniuses…futures rally 50 bps in 2 weeks, so they change their calls…so brave of them.  They deserve medals and/or Blue Peter badges.”

Now, I didn’t even have to look up Blue Peter badges to know that this was sarcasm.  Really.  (Blue Peter badges are actually awards from a BBC children’s show).  The point is, our official thinkers are simply playing catch-up with the markets.  By the way, I also had to look up “pusillanimous”.  That word fits too. 

It’s an odd time.  At first,  it was Trump doing everything he could to juice up the stock market (and take credit for it).  The Fed saw this as an opportunity to “normalize” and lean against the tide of asset price appreciation.  And of course, the Fed got a little TOO normal.  We’ve now reached the point where Trump is damaging stocks with trade policies.   He’s using tariffs like the only hammer in the toolbox.    And it’s the Fed that is going to have to save the stock market. 

In terms of the Fed, the speech that I will focus on is Clarida’s from last week.  Of course, he went to Harvard. (“He was wearing my Harvard tie.  Can you believe it?  Oh sure, like HE went to Harvard”).*    My take-away is that the Fed is now simply backwards-looking and reactive.  After tightening and tapering a bit too much, the Fed has thrown up its hands and said now we’re just data dependent.  On the fiscal policy front, it’s hard to tell what comes next. I have a friend who works at a nationwide broker, a firm that was growing very strongly in terms of asset gathering (management) and other product lines.  The top-brass had planned for two hikes in 2019, i.e. further expansion, and this company makes a lot more money when there is a positive yield curve and fat rates at the short end.  But this year, she told me, growth has stopped cold.  Now it’s all about cost cutting.  Clearly, official projections, by the Fed, and by many large banks and other financial institutions, have proven wrong.  Businesses now have to adapt to a new reality and more uncertainty.  Of course, higher rates are good for some businesses, and low rates good for others, but it’s hard to find a lot of firms that benefit from funding costs that are higher than expected longer term revenue flows, and that’s the environment that an inverted curve forecasts.

I never realized that Clarida put out an album called Time No Change in 2016.  I’ve posted a youtube link at bottom.  I like it.   We could simply describe Fed policy with song titles from this album: ‘Gone Too Far’ [with rate hikes and taper].  ‘Just Can’t Wait’ [to start easing].  Time No Change [an inverted curve is never good, and this time’s no different].  But turning to the speech….he starts by saying the Fed has pretty much achieved maximum employment and price stability.  He reviews where we are: strong growth, low unemployment, but muted inflation.  Then there’s a line which starts, “As we look ahead…”  where he falls back on the woeful SEP projections.  Looking for 2% growth and PCE inflation, and a gradual increase to 3.9 unemployment over next few years.  Then it’s back to the tired re-tread of structural changes:  Low neutral rate.  Falling unemployment. A small pick-up in productivity.  Price inflation that’s less responsive.  Then we get to the meat of the topic, the outlook on monetary policy.  And we’re left with, “We’re going to let the data inform us.”  Dude, the market is giving you a LOT of data that is NOT squaring with previous or current projections.  Then it’s back to the Taylor rule, allusions (illusions?) to the Phillips curve, inflation expectations, and. ‘We need more study’.  In sum,  ‘The economy is in a good place, we’re at an appropriate funds target, declines in inflation are transitory.’  If this speech is representative of the Fed’s new communication initiative, we’re in trouble.  It’s like the thin gruel served to Oliver Twist and his mates.  “Please sir, I want some more.”  The interest rate markets are desperate with hunger [for rate cuts] and reckless with misery. 

The USD has generally strengthened as the Fed tightened and the curve flattened.  The short end rally last week gives a hint of what could become the elixir of easier financial conditions if/when the Fed actually cuts.  A steeper curve, and a weaker dollar.  The next FOMC is June 19, just over two weeks away.  A rate cut at that meeting would be construed as panic.  However, an announcement of a more rapid end to tapering under the guise of (necessary) technical adjustments to balance sheet policy is very possible.  Note that oil has fallen 20% since April’s high.  This compares to a 40% decline seen from October to December of last year.  Gold surged over $18/oz on Friday, with the gold/silver ratio at 89, a level not seen since  the early 1990’s.  The red/gold euro$ pack spread jumped over 7 bps Friday and is making a series of higher lows and higher highs.  There is stress in the system.

This week brings ISM data, with Mfg on Monday and Services on Wednesday.  On Tuesday, June 4. Vice President Pence gives his Tiananmen Square Protest provocation speech.  Thursday brings the Fed’s Quarterly Z.1 report on Financial Flows and Net Worth.  Friday is the Employment Report. 

OTHER MARKET/TRADE THOUGHTS

In February, when EDZ9 was trading around 9730-35, the at-the-money 9737.5 straddle was trading 26.0.  Now, with over three months having rolled off the calendar, the atm EDZ9 straddle, which mind you, is a strike price 50 bps lower in terms of yield at the 9787.5 strike, is trading 38.0.  They don’t teach that one in the options manual. 

Let’s look at something else on the dollar curve.  Below is a chart of the 2nd to 6th eurodollar one-year calendar spread (constant maturity).  That would now be EDU9/EDU0 which settled -55.5 on Friday, a new low for the move.  The inversion (as the spread became negative), started to occur at the end of last year.  This significantly pre-dates the 3m t-bill to 10y inversion that everyone is now pointing to,  (because that’s the one the Fed watches).  FORGET THE FED.  I’m here to tell you, You CAN fight the Fed.  That’s essentially what Scott Mather of Pimco said on a BBG interview last week.  Central banks have lost their Oz magic.  The man behind the curtain is fiddling with ineffective levers.


So anyway, you can see that the previous inversion, or red shaded part of the graph, was in 2006.  The Fed was in a hiking cycle from mid-2004 to mid-2006.  By late 2006 to mid 2007, the 2nd/6th one-year spread was about where it is now.  The market was saying the Fed had gone too far.  But of course, stocks didn’t get that message, having run up into June of 2007, pulled back, made a new high in Oct 2007, before finally puking.  The thing to recall about 2006 was that the Fed Fund target had gone all the way up to 5.25%.  At that time, when negative one-year ED spreads were indicating that there might be cuts of 50 bps or more, there was a lot of room.  Now of course, the FF target is in a range of 2.25 to 2.50.  A 25 bp cut is a much bigger percent.  And that’s what the Fed keeps saying.  A lower R* means we will be revisiting the zero-bound more quickly.  Oh, great!

 

So, the Fed’s reactive.  The market is insisting that the Central Bank needs to officially cut (or we’ll do it for you).  The markets NEED a cut in funding costs, which will provide some relief by weakening the dollar.  The curve will steepen.

In terms of trades, June eurodollars and midcurves expire just prior to the June 19 FOMC.  The next chance for concrete improvement in China negotiations is the end of month G20 confab, where Trump may meet with Xi.  Until then, flows will likely favor safe assets.  However, the longer end of the eurodollar curve could still see some selling pressure. 

As Gundlach recently suggested, there has been a nice pop in bond volatility.  It’s probably not over yet.  It’s hard to buy at these levels though, and it’s hard to buy treasuries at these yields, though forced trades could still easily provide a push. 

5/24/2019 5/31/2019 chg
UST 2Y 215.5 194.4 -21.1
UST 5Y 211.0 192.9 -18.1
UST 10Y 232.0 214.2 -17.8
UST 30Y 275.1 258.2 -16.9
GERM 2Y -63.1 -65.9 -2.8
GERM 10Y -11.7 -20.2 -8.5
JPN 30Y 49.8 45.4 -4.4
EURO$ Z9/Z0 -36.5 -40.5 -4.0
EURO$ Z0/Z1 3.5 8.5 5.0
EUR 112.08 111.71 -0.37
CRUDE (1st cont) 58.63 53.50 -5.13
SPX 2826.06 2752.06 -74.00
VIX 15.85 18.71 2.86

https://www.youtube.com/watch?v=lIjqdRiM3Pc  (Winthorp)

https://www.youtube.com/watch?v=u-VTtE37qhY (Clarida)

Posted on June 2, 2019 at 11:59 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

US ten year vs German Bund

Posted on May 31, 2019 at 7:10 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options