How do we do it? VOLUME

An abbreviated comment this week…

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

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


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

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

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


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

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

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

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

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


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

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


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

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

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

Nov 8. The Shakeout begins

Goodbye Mr Magoo

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

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

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

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

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

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

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

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

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


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

Bulls and Bears

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

Nov 6. Finally….

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

Nov 5. SUPPLY (of political advertising)

–Rate futures closed at or near new lows on Friday with the ten year yield up 7.4 bps to 321.2.  Modest bounce this morning but supply comes this week starting with today’s $37 billion 3 year note, followed by 10’s and 30’s Tuesday and Wednesday…$83 billion in total raising $29 billion in new cash.  This is the opposite of QE, even if there wasn’t balance sheet normalization occurring by the Fed.  The giant sucking sound is the US treasury taking in cash.  To be fair, it’s not exactly the opposite of QE, as the US gov’t is spending the cash to juice up the economy and run election campaign ads.  Feel better?
–Job report Friday was strong with NFP adding 250k and yoy wages +3.1%  News today includes ISM Service PMI expected 59.3 from 61.6.
–Many markets have traced out similar moves to previous market action.  For example, SPX has had about the same magnitude drop as that seen in February, but this one was more controlled and didn’t have as move of a vix surge.  EEM. the emerging market etf, fell about 28% from May to August of 2015 during the energy rout, while this year it has fallen 27% from January to October.  Crude oil had a huge rally of 18% from August to October, but has now erased that move and more.  It’s tempting to think that things could stabilize here, but if they don’t, the continuation could get violent.  The Fed wants to lean against the idea of providing a liquidity put, and FT has a headline this morning that BoJ’s Kuroda hints at tightening.  It’s turning into a liquidity issue.
— Several liquidation trades Friday.  Large selling of EDZ8 9725 straddle at 9 appears to have been exiting (perhaps forced?).  0EZ 9687/9675/9662/9650 put condor was sold at 6.0 covered 9678 in size 60k, also an exit; settled 6.25 vs 9676.  As mentioned over the weekend, inflation indexed notes are making new daily highs, with tens providing a ‘real’ yield of 1.15% as of Friday.
Posted on November 5, 2018 at 5:22 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Back to 1994 -Weekly Comment

November 4, 2018

Then he lights every match in an oversized pack,

Lettin’ each one burn down to his

Thick fingers before blowin’ and cursin’ them out.  -Sheryl Crow.  All I Wanna Do… from 1994

Above are a couple of charts I created, comparing 1994 to 2018. I’ll return to them in a few paragraphs.

We’ve now had a long period of loose conditions, of excess capital in search of yield, of high liquidity and low volatility, and of high asset prices.  Things are changing.  The Fed may perceive short rates as still leaning toward the accommodative side of the spectrum, but I believe that the market itself is now becoming much less charitable.  It’s not a “reach” for yield these days.  A few examples:  First and most obvious is that stocks had a challenging month in October.  Some people think that we just get past this corrective price action and it all goes back to levitating.  My reading of markets is that this phase of corrective price action has a long way to run.  Much has to do with public versus private behaviour.  Apart from stock prices, let’s consider 3 month libor.  The Fed hiked on Sept 26.  On Friday, Sept 28, 3m libor was just a shade under 2.40.  Now it’s just a shade under 2.60, so 20 bps in a bit over a month and there are still 1 ½ months to go before the December quarterly FOMC.  That’s a pretty good move, even given near certain expectations of a Fed hike.  There is also a Fed meeting next week on the 8th, and the fact that the Fed Effective rate is now exactly equal to Interest on Excess Reserves (IEOR) has some thinking that a tweak could come sooner than later.  As another example of tighter conditions, note that ‘real’ rates as expressed by inflation-idexed notes, or tips, have been rising, closing at a new high for the year in both 5’s and 10’s, 1.12% in the former and 1.15% in the latter.  Note that the 5yr tip was 12 bps in November 2017, and it’s now 100 bps higher at 1.12%.  Maybe that shouldn’t be surprising at all, right?  The Fed raised 100 bps over that time frame.  So perhaps Powell deserves a pat on the back, raising real rates and keeping inflation expecations more or less anchored.  However, my feeling is that capital is becoming more discriminating and is demanding returns and considering costs.  Consider the two year treasury yield to the S&P dividend yield.  In 2016, the two year yield was 175-200 bps BELOW the dividend yield.  Now the 2yr is 95 bps ABOVE the dividend yield (2.91% 2yr vs 1.95% Div yield).  TINA?  There Is No Alternative?  Now there IS an alternative, and it’s risk-free.

After the crisis, the Fed and the government transferred private debt onto the public balance sheet.  Now that process is reversing, although the voracious borrowing appetite of the government is accelerating.  It’s summed up by the Ghostbusters scene when Drs Venkman and Stantz have been fired by the state university.  Ray Stantz to Venkman: “Personally, I liked the university. They gave us money and facilities; we didn’t have to produce anything. You’ve never been out of college. You don’t know what it’s like out there! I’ve WORKED in the private sector. They expect *results*.”  The Fed didn’t expect *results* or yield on the balance sheet.  They just wanted to force the public into risk investing and take away the fear.  Strategies like selling premium to capture those few precious extra basis points came into vogue.  Loan covenants evaporated.  Well the fear is creeping back.  It’s evident in rates, in spreads, in VIX.  As pointed out last week, 5 year Credit Default Swaps on high yield are blowing out to new two year highs.  The premium sellers needing a couple of extra bps at the margin are gone.  As an example of public vs private, the Fed didn’t hedge its MBS holdings, but as these assets are trimmed from the Fed’s balance sheet, they land in private hands that have to worry about pesky considerations like prepayments, etc.  Embedded short options need to be hedged.

Which brings us to the top of the page charts again.  In 1994, after over a year of FF at the then historic low of 3%, the Fed tightened aggressively to 5.5% by November, and then tacked on the last hike of 50 bps to 6% in February 1995.  FF doubled in a bit over a year.  As is shown on the top chart, the ten year yield went from 5.57% in Nov 1993 to 7.95% in Nov 1994, a nominal change of about 240 bps.  However, in terms of percentage change, which, after all, is how the cash flows are altered, the change in that episode and today’s have nearly been identical.  By the end of 1994, tens had topped over 8%.  In December, Mexico devalued. The Tequila Crisis.  The peso’s value was chopped in half and by 1995 inflation in Mexico hit 50%.  The Fed looks back on the rapidity of the 1994 tightening campaign as a policy mistake.  As can be seen in the lower chart, US yields tumbled all the way back in the first half of 1995.

A few things are different now.  Most notably, Federal Govt debt to GDP was below 70% in 1994, now it’s 104% according to the St Louis Fed.  Corporate debt to GDP was around 40% of GDP in 1994, now it’s over 45%.  The amount of corporate debt hovering just above junk is at a record percentage.  Rate increases now should have a larger effect on cash flows, and let’s face it, it’s now a ‘cash flow’ economy.  The Chinese economy wasn’t nearly as large as a percentage of global GDP as it is now.  And the amount of US debt currently being auctioned is huge.  This week brings 3, 10, and 30 yr sales of $83 billion, with $29 billion of that being new money.  There was a time when China was selling us manufactured goods and buying US treasuries in what was referred to as ‘vendor financing’.  No more.  Trump is currently lighting every match in his oversized pack and letting them burn down to our fingers.  This past week, he blew out a couple of matches by making overtures of a deal with China.  But next week he will light a few more to keep drama high going into the G20 meeting at month’s end, and of course the midterm elections loom this week.

The question is whether markets will resolve as they did in 1994 with a roundtrip to lower bond yields, or whether conditions have changed to the extent that official actions of intervention have more muted impact as both yields go higher and stocks move lower.  By the way, just after bond yields peaked in Nov 1994, SPX bottomed in December just above 440 and proceeded to rally in a nearly straight line to 585, a gain of over 30%.  Could it happen again?  Well at the end of 1994, stock mkt cap as defined by the Wilshire 5000 to GDP was 61%.  Now it’s 139%.  I don’t think current valuations allow a 1995-like rally.

My personal bias is that heavy debt and related challenges faced by both the US and countries with large USD debt burdens will make it difficult to gracefully exit the current deterioration.  While the Fed looks back at 1994 as a mistake, I don’t think there is any such concern within the institution currently; the finger pointing is coming from Trump.  The administration has made every attempt to front load stimulus, but now may have a more difficult time with a divided Congress and less forgiving markets.  Despite last month’s plunge in crude oil, broader inflation has taken hold, apparent in Friday’s wage gain of 3.1% yoy.  Even if Friday’s wage number was skewed by a low year-ago base, continued gains in payrolls indicate pipeline price pressures.  Will the Fed blink?  I think markets will force that outcome.  First will come a ‘pause’ in rate hikes, if not in March then in June.  Then, as the curve steepens, the Fed will decide that a $4 trillion balance sheet actually is EXACTLY the right size, and balance sheet roll-off will end.  Finally, a return to QE as interest cost on the Federal debt balloons.

In a sign of what’s to come for the US, consider that Urjit Patel, head of the RBI, offered to resign last week as Modi’s government continues to pressure the central bank to stimulate.  At the end of October, RBI deputy governor Viral Acharya, gave a powerful speech in defense of the central bank’s independence, and it pertains not just to India, but to all nations.  From the speech (link at bottom):

The second part of the explanation as to why the central bank is separate from the government relates to the observation that much of what the central bank manages or influences – money creation, credit creation, external sector management, and financial stability – involves potential front-loaded benefits to the economy but with the possibility of attendant “tail risk” in the form of back-loaded costs from financial excess or instability. 

Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.  (Sounds a little like Jules Winnfield in another 1994 classic, Pulp Fiction)


Fed Fund spread settlements indicate Fed hike odds.  Nov/Jan settled 18.75, plus 1.75 on the week.  Given odds of a change in IOER this spread forecasts over 90% odds of a Dec hike. Feb/April settled 17.0, up 1 on the week.  May/July settled 13.0, up 2.  Friday’s strong payroll report and stock rally off Monday’s spike low helped re-assert a view that the Fed will move quarterly toward neutral.

There is a lot of looseness in the front end of the curve.  As mentioned, libor has surged 20 bps since the end of September.  3m libor is just under 2.60% or 97.40 in euro$ futures terms.  November ED expires in 2 weeks and settled 97.31, which requires 9 bps of convergence in 2 weeks!  Why then, are they selling EDX8 9725 straddle at 5.0 bps?  Or the EDZ8 9725 straddle at 9.0 bps?  These were the settlement prices vs EDZ8 at 9722.5, which currently has a spread of over 17.5 to 3 month libor.

The other aspect of the curve that’s somewhat interesting is that the one-year euro$ spreads form a bowl from fronts to deferred.  For example M9/M0 is +18. One year further out we have inversion, M0/M1 is -3.5 (the lowest spread) then M1/M2 is 0.  M2/M3 is +5.5 and M3/M4 is +9.5.  If we take the Fed at its word and call the neutral rate approximately 3%, then 2 or 3 more hikes essentially hit target.  By summer of 2020, the market indicates no growth (neutral rate stops the economy?)  and then recovery by 2022.


  10/26/2018 11/2/2018 chg
UST 2Y 280.6 291.0 10.4
UST 5Y 290.4 303.6 13.2
UST 10Y 307.4 321.2 13.8
UST 30Y 331.3 345.3 14.0
GERM 2Y -63.0 -63.0 0.0
GERM 10Y 35.2 42.0 6.8
JPN 30Y 85.7 87.0 1.3
EURO$ Z8/Z9 40.0 46.5 6.5
EURO$ Z9/Z0 -2.0 1.0 3.0
EUR 114.04 113.88 -0.16
CRUDE (1st cont) 67.59 63.14 -4.45
SPX 2658.69 2723.06 64.37
VIX 24.16 19.50 -4.66

Posted on November 4, 2018 at 11:51 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

November 2. Employment Report. Keeping it REAL

–Employment report today expected 3.7% with non-farms 200k and yoy Avg Hourly Earnings 3.1%.  Last year’s AHE was abnormally low at 2.3, so off a low base, today’s wage number is expected to be solid.  A story on ZH notes that many consumer prices have been, or on the verge of being raised, which will cause an inflationary acceleration.  However, inflation breakevens as indicated by tip vs treasury spread, are slightly compressing, with yesterday’s inflation-index to ten year spread at 203 bps, down from 217-219 at the beginning of February.  The chart below tells the story.  NEW HIGH yesterday on the ten year inflation indexed yield to nearly 111 bps!   This is an increase of about 60 bps since the start of the year.  Why?  For a long time the Fed was content to see real yields in negative territory.  What has caused ‘real’ rates to surge 40 bps over the last two months?  My thesis is that investors are being more discriminating.  If that is correct (and if I am wrong or there are technical reasons for this move please let me know) then it has fairly large implications across markets.  Real rates low, forced into risk.  Real rates high, then competition for investment flows increases.

–Today’s story is pretty simple.  Stocks have vaulted higher, in spite of AAPL’s immediate $11 decline post-earnings, due to news summed up in this BBG headline:  Trumps Asks Cabinet to Draft Possible Trade Deal With China.  Possible deal and a strong employment number means higher yields.  Oh, and ‘surprise!’ CNY has backed off from threatening 7.  For the last couple of days there has been fairly sizable buying of Week-2 TY puts (Nov 9 expiry, which covers the midterms).  On Tuesday 118.25p for 13 vs 118-27 and yesterday 118.0p for 14, 25k cov 118-13.   Currently 118-12 in the contract.  High gamma puts could cause downside acceleration if the initial buyer isn’t trying to immediately monetize gains.

–Flying in the face of the inflation narrative is recent price action in WTI-Crude.  Late yesterday i was down 1.80 to 63.51 (CLZ8) and shows no bounce this morning.  Important area to try to hold.


Posted on November 2, 2018 at 5:06 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

WTI Crude

Crude oil pressing new lows.  CLZ8 is through 200 day by small amount.  On a rolling basis, using CL1, we’re well through 200 day.  Important levels here.
(this in spite of Gold +$19/oz today and silver +42 cents)

Posted on November 1, 2018 at 10:52 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Oct 31. Will it get scary this afternoon?

–Stocks continue to bounce this morning, approaching the initial spike lows set Oct 11: 2712 in ESZ and 6908 in NQZ which should now act as resistance levels.  Fed’s liquidity withdrawal continues today with the roll-off of >$22 billion in maturing treasuries.  Treasury futures are lower this morning in conjunction with higher stocks.  It used to be that days in front of employment reports saw buyers of high gamma puts on the first red ED midcurve.  This buying appears to have shifted further out the curve with a new buy of 27k TY2X (week-2 Nov, expires on the 9th, just after midterm elections).  Traded 13, settled 14 ref TYZ8 118-25.0.  There was also buying of 2EZ 9675/9662ps for 4 (3.75s) appears to have been rolling the long put into higher strike.
–Yesterday tens rose 2.5 in yield to 3.108.  The old yearly high set  in May was just over 3.12; this high was vaulted in early October but should act as a pivot of sorts; we’re currently around 3.14%.
–China’s manufacturing PMI signals slowing growth at just 50.2 (vs 50.6 expected).  CNY this morning edges closer to 7 at 6.97.  Japan holds policy steady.  RBI’s head Urjit Patel said to be considering resignation as the independence of India’s central bank is threatened.  Growth at the sacrifice of sound monetary policy?  The Fed holding out so far, helping the dollar index which has edged to a slight new yearly high.
–US news today includes ADP expected 187k, Employment Cost Index +0.7 and Chicago Purchasing Mgr, expected 60.  The cranes are still dotting the Chicago skyline, but sales don’t appear to be keeping pace.
Posted on October 31, 2018 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options