Bund yield sub-zero first time since 2016

March 22, 2019

–EDZ9/EDZ0 posted a new low settlement of -26.0 yesterday, with front Dec pressured in part by option trades (buyer of 40k EDZ9 9750/9737/9725/9712 put condor for 5.25).  Also of note is that the Fed Effective rate ticked up to 2.41%, 1 bp above the interest on excess reserves, causing sales in front FF contracts.  Net changes on the day in rate futures were negligible, although there was a slight flattening bias in the curve, with 5/30 pulling back from Wednesday’s new high of 64 to 62 yesterday.  Ten year yield was unch’d at 2.537% even as stocks exploded higher.  

–Forward euribor calendars are also making new lows, for example ERZ0/ERZ1 was +19.5 late as compared to EDZ0/Z1 at -3.5.  The bund was at a yield of 4.1 bps yesterday and has sunk below zero today as the German PMI Mfg index fell to 44.7. its third decline in a row.  Every time the Fed tries to depreciate USD, the Germans respond!  Of course, yoy changes in S Korean Exports and Taiwan export orders near -10% continue to reflect gloom in global trade.  In the US, PMI Composite today expected 55.2 from  55.5 with Mfg at 53.6.  Existing Home Sales expected +2.2%.

–With a Fed effective of 2.41% the ten year yield is just 1/8% above that level.  Even with the Fed’s capitulation this week, they haven’t been able to restore the lubricant of positive carry with 2’s and 5’s both sub-2.4%. Stocks seeing a slight pullback this morning following yesterday;s strength, with small-cap Russell the notable underperformer.  

Posted on March 22, 2019 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

The Fed Folds

March 21, 2019

–The Fed effective rate is 2.40%.  As of floor close yesterday, both 2’s and 5’s were lower at 2.398 and 2.334.  Three month libor is around 2.60.  The ten year yield as of floor close was 2.537.  The first nine 3-month euro$ calendar spreads settled negative (inverted) [thanks DK].  EDZ9/EDZ0 is still the most inverted one-yr eurodollar calendar at a new low settle of -25.5, although it’s now tied with EDU9/EDU0, which plunged 8 bps to also settle -25.5.  Previous low settle in EDZ9/Z0 was -22.0 which was near the height of stock market worries on Jan 3.  On that date, TYM9 had settled 123-135; yesterday TYM9 settled 123-13.  Even though stocks have rebounded in Q1 as have inflation expectations, the Fed went all in on stimulus, removing the prospect of rate hikes and ending balance sheet reduction in Q3.  Ten year note to tip closed at a new recent high 197.6 bps, again nearing 2%.

–When big trades used to hit the floor, the local community’s common refrain was “That guy knows something [that we don’t]”  Does the Fed know that something ominous is around the corner?  The ‘real’ rate as displayed by the ten year inflation-indexed note fell 9 bps to 0.56%.  Last year it had surpassed 1%.  Last year Brainard said in a speech that the neutral rate WAS GOING UP as the Fed raised rates.  Now I guess it’s going down.

–Here’s Powell  from last October, saying the economy’s great and everything is rosy. https://www.reuters.com/article/us-usa-fed-powell/powell-u-s-outlook-remarkably-positive-with-low-unemployment-tame-inflation-idUSKCN1MC2A7
Then Q4 hit and the Fed’s psychology has flipped.  Doesn’t really instill much confidence. If things are good, why is the Fed once again trying to drive the investment community into risky assets?  What if that plan backfires?

–Gold is up $16 this morning at $1318/oz and Palladium’s at another new high with the June contract around $1570.  5/30 ended at the highest level since 2017 at 64 bps.  Red/gold ED pack spread also notched a new high at 15.625, up 2.5 on the day.  The Fed has implicitly communicated a plan to let inflation “run hot” which should encourage the steepening trend at the long end.   Although USM closed decisively over 146-16 resistance with the 30y under 3% yield at 2.974%, a further drop in yield should lag the rest of the curve.  The Fed announced maturing MBS will be invested in treasuries.  The Fed doesn’t hedge MBS.  The private market does.  At the margin, there should be more volatility at the longer end.  

–News today includes Philly Fed expected 4.8 from -4.1.  Jobless Claims 225k.  Leading Index +0.1%

–In yesterday’s note, I said I thought Powell and the Fed would lean against renewed strength in the stock market and strike a more hawkish tone. As Ron White would say. “I was wrong”

Posted on March 21, 2019 at 5:06 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Odds and ends

March 20, 2019

–FOMC day.  Dots and balance sheet plans will be scrutinized, with an expected announcement of a schedule to end balance sheet run-off.  A decision regarding the maturity of the Fed’s holdings is likely further down the line.  The Fed has consistently warned of risks relating to a global slowdown, which was on display with the earnings release by Fed Ex, which fell 4.6% after hours.  The company cited, in part, slow global trade.  As an aside, Dow Jones Transports had an outside day and closed lower.  Unlike other indices, the rally in DJT through February failed to reach December’s high, and this last move up failed to reach February’s high. 

–Yesterday’s action in rates was quiet, with net changes pretty much within 1 bp of the previous close.  It’s somewhat interesting that the last two red midcurve straddles settled identical to the last two greens; 0EZ and 0EH 9762 straddles settled 40 and 47, as did 2EZ and 2EH 9762 straddles.  Nominally green premium has been the highest, so current levels might indicate a flatter curve over the short term.  Also worth a mention is that 0EU 9762^ on EDU20 is a half basis point higher than 3EU 9762^, 31.5 vs 31.0.  My inclination would be to buy blue/ sell red (THIS IS NOT A RECOMMENDATION).  The long bond contract (USM9) may provide a decent indication of how the market perceives the Fed and the economy going forward.  There is heavy resistance in the contract at 146-16, just under 3% in terms of yield.  A few closes above that level would signal slowing inflation and growth.  

–Quick note on CME stock.  The CME this month announced plans to charge a fee on collateral holdings, for example, when t-bills are deposited for margins.  Seems as if the exchange is trying to squeeze revenue wherever it can as open interest levels have stagnated.  Total exchange open interest one year ago to yesterday is down around 6% as the Fed has helped stifle activity.  

–One last note concerns the article below and student loans.  The White House is proposing a cap on student borrowing. Key passage:  “Underpinning that idea is a belief that colleges are largely responsible for the nation’s debt woes. The WH says easy access to federal aid has led colleges to drive up prices. adding that they are ‘unable or unwilling’ to make education more affordable.”    


Posted on March 20, 2019 at 5:14 am by alexmanzara · Permalink · 3 Comments
In: Eurodollar Options

Is Powell dovish?

March 19, 2019

–Stocks at new ytd highs this morning, as is WTI crude, with CLJ nearing $60/bbl at 59.60 last, +22.  However, rate futures are also slightly better bid as the market anticipates a dovish Fed.  While Q1 growth will be weak, former NY Fed chief Dudley thinks that there will be a rebound later in the year and, with that, a chance for more hikes as wage pressures build.  In any case, I would imagine that Powell will not be particularly friendly in his news conference as he is not a stock market cheerleader.  Rather, I think his instinct will be to lean against the stock market rebound and the growing perception that monetary policy has fed into asset price inflation which exacerbates income inequality.–Japan is pegging the 10 yr JGB around zero.  From BBG: “Brian Chappatta notes that the all-important 10-year Treasury note’s yield has fluctuated within a 22-basis-point range since early January, narrower than any calendar-year quarter since 1965. On top of that, expected implied volatility as tracked by Bank of America Corp.’s Move Index just fell to its lowest level since 1988.”  Seems like US tens are pegged as well.  By the way, as US deficits increase, it’s worth noting that Japan’s debt to GDP surpassed 250%

–April options in treasuries expire Friday.  Before the FOMC there was some new buying of otm options.  FVJ 114.75p 2.5 paid 45k and FVK 115.25c 4.5 for 25k.  One large trade of note in dollars: +30k 0EU/2EU 9775/9812c spread spread for 2.0, paying for green.  EDU20/EDU21 futures spread is -6.5, but rolls lower as EDM0/EDM1 is -11.5.  So if the curve stays the same shape but parallel shifts higher, over time this trade accrues a few bps.  

–Factory Orders today expected +0.3.  

Posted on March 19, 2019 at 5:24 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

When I was 16

March 18, 2019

–New recent lows in the first three one-year calendar spreads with EDZ9/EDZ0 still the lowest at -21.0.  In the beginning of January the lowest settle for a one-yr spread was -28 (June’19/June’20) so we’re getting close.  The attached chart shows the first five quarterly June contracts.  It was in early December, before the FOMC, that near calendars inverted.  Since then, greens (3rd year) have remained the strongest part of the curve, and the green pack remains just about 1/4% lower in yield than the current libor settings.  Hard to see that changing going into this week’s FOMC.

–Further back on the treasury curve 5/30 continues to grind to ever higher highs, end the week at 62.0.

Below is sort of an amusing thread on why Nancy Pelosi’s idea of lowering the voting age is not such a great idea.

Young Americans Hilariously Explain Why Lowering the Voting Age to 16 Is a Terrible Idea :: Grabien NewsYoung Americans Hilariously Explain Why Lowering the Voting Age to 16 Is a Terrible Idea ‘When I was 16, my friends and I bought a live lobster, put it on a leash, and walked it around the neighborhood at 2am’news.grabien.com

When I was 16 me and my friends went into PetSmart and bought a bunch of live mice and then let them loose in Kroger.

Posted on March 18, 2019 at 5:07 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

St Pat’s in Chicago

While the major party is downtown along the Chicago River which is dyed Kelly Green by the Plumber’s Union. there are plenty of other festivities through the city. I had the chance to drop in on this one at the Hall of the Internat’l Brotherhood of Electrical Workers as I was invited by Bill Corry to tag along on the bus with the Shannon Rovers bagpipe group and former Parade Queens. Here’s a shot of the silhouettes of bagpipers playing to a full hall against the backdrop of the IBEW logo. [Weekly rates comment in post below]

Posted on March 17, 2019 at 1:06 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Gold and Golds

March 17, 2019 – Weekly note

I don’t know much the gold/silver ratio.  Perhaps some of the extraordinary strength in palladium caused gold/silver to rally in sympathy.  In any case, the chart below is interesting, as the ratio is pressing new highs just under 85, even as stocks have seen a spirited rebound from December’s swoon.  The chart shows the gold/silver ratio overlaid with SPX since 2000.  In general, it appears as if the ratio strengthens with the onset of financial stress, using SPX as a proxy.  Mid-2008 is a stark example. The site monetary-metals.com has more information about gold/silver and also has a chart which shows that the 6-month Gold forward rate has dropped from nearly 2.5% to below 2.1% in the past three months. 

Now consider the gold-pack on the Eurodollar strip, which is the fifth year forward.  As of Friday, it was the average price of the four contracts EDH23, EDM23, EDU23 and EDZ23. (On Monday it will be the four contracts starting EDM23).  These forward contracts should be affected by inflation expectations and term premium.  Of course, at the time represented by these contracts, we won’t even be certain how much libor-based trading will occur as the market’s benchmark rate is to be changed.  What is interesting on the curve however, is that the gold pack has just squeaked over the high set on January 3, the day of maximum turmoil related to stocks, a day which sent rates and near euro$ calendar spreads hurtling lower.  On that day, the gold pack settled 97.50125, which was up 14.5.  On Friday it settled 97.5025 (+4.0).  The strongest part of the curve on Jan 3 was the red pack (2nd year forward) which was up 18.375 at 97.67875.  On Friday the red pack settled 97.570, more than 10 bps lower.

Below is a chart of EDM23, representative of the gold pack.  Stocks have bounced.  But back dollars aren’t buying into the idea of an economic resurgence and associated inflation.

It’s also worth taking a look at a longer term chart of what is now the lowest one-year calendar spread on the curve, EDZ19/EDZ20.  On Jan 3 the most negative spread settlement was June19/June20 at -28.  Dec/Dec had settled -22.0, and on Friday had the lowest settlement since then at -21.0.  The chart below is a constant maturity 3rd to 7th quarterly, the slot into which Dec/Dec will roll next week as EDH19 expires.   This chart starts in the year 2000.  The lower panel is the spread, with negative values in red.  The lowest print is -47.5 in late 2006, after the hiking cycle ended, but before the first ease occurred which was Sept 18, 2007.  The spread is saying the Fed is ‘tight’.  Stocks are concluding that accommodation will continue.  

Going into the FOMC meeting this week, there has been quite a bit of discussion relating to a change in the Fed’s policy framework.  The idea of letting inflation run over the 2% target to make up for previous shortfalls is finding footing, and the role of controlling inflation expectations in terms of monetary policy has also been favorably mentioned by Powell. 

The problem is that, as usual, some pockets of the market are calling out the Fed.  That’s why the dots, which will surely be revised lower this week, are somewhat irrelevant.  The market is leaning towards an ease this year in spite of the rebound in equity prices.  The gold-pack is dismissing the thought of higher inflation.  Other market indicators of inflation, like the ten-yr inflation-indexed breakeven and the 5y5y forward inflation swap have rebounded off the lows set in early January, but have fallen quite a bit short of reclaiming the highs of last autumn.  The chart below shows that the ten year breakeven (in yellow) was almost 2.2% in October, fell to 1.7% at year end and is now 1.95%.  The 5y5y inflation swap (white) was nearly 2.5% and is now 2.28%.  And the 18th quarterly euro$ in amber, now EDM23, was 3.25% in October, but is currently 2.49%, equaling the low in early Jan, as mentioned above. Down 75 bps!

18th Qtrly Euro$/ 5y5y Inflation Swap / 10y tip breakeven

With the change in policy and tone by the Fed, it now finds itself at the mercy of markets.  The SPX break in Q4 is being viewed by interest rate markets as a serious episode that will take a longer time to heal.  With a Fed on hold it’s back to TINA for stocks. 

A couple of other things worth mention.  Moody’s has a data set known as CQI, which stands for bond Covenant Quality Indicator.  Here’s the headline last week from the Moody’s site for North America: ‘Heavy Ba concentration and weak protections push CQI to record worst’.  From the article, “Our Covenant Quality Indicator has worsened by 10% in 2019, reflecting both an abnormally high concentration of Ba-rated bonds and very weak packages in lower rated bonds.” 

Second, while the upward sloping yield trendline off the low in 2016 had been broken in December for the ten year treasury, the ten year inflation-indexed note just broke the trend last week.  From a ‘real’ yield high of nearly 1.2% in Q4, on Friday it closed at just 64.5 bps.  Not exactly a sign of productivity led growth prospects.

3/08/2019  03/15/2019  
UST 2Y 245.5 244.0 -1.5
UST 5Y 242.0 239.5 -2.5
UST 10Y 262.1 258.9 -3.2
UST 30Y 301.5 301.5 0.0
GERM 2Y -55.0 -54.1 0.9
GERM 10Y 6.2 8.4 2.2
JPN 30Y 57.0 57.5 0.5
EURO$ Z9/Z0 -19.5 -21.0 -1.5
EURO$ Z0/Z1 -3.0 -3.5 -0.5
EUR 112.36 113.26 0.90
CRUDE (1st cont) 56.07 58.52 2.45
SPX 2743.07 2822.48 79.41
VIX 16.05 12.88 -3.17
Posted on March 17, 2019 at 12:46 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

THAT is why I am your king!

March 15, 2019

–Going into next week’s FOMC meeting, the new ‘dot plot’ and projections should be interesting.  In December, the projections indicated 2.9% for the Fed Funds target by the end of the year, so two hikes.  However, the dot plot actually had 6 dots at 3.1% (out of 17 total).  Obviously these projections will come down to some degree.  But what is the MARKET saying, and further emphasizing yesterday?  That the next move is going to be a cut.  For example, EDH9 is expiring Monday and settled yesterday at 97.3875.  However, there was new buying in EDZ9 9750/9785cs for 5.75 (40k).  There was also smaller buying in EDZ9 9750/9775c 1×2 for 0.5 and 9762/9787c 1×2 for flat.  At expiration, EDZ9 has to trade above 9756 for the initial call spread to break even.  I.e. that trade is looking for a cut. There’s an article on BBG today: ‘Fed puts inflation expectations at the heart of  major policy review’.  Pinning hopes on expectations of a data set that’s difficult to measure in order to capture the holy grail of 2%.  Sounds a bit desperate. (You can’t expect to wield supreme executive power just ’cause some watery tart threw a sword at you!) [that one’s for you YZ]  

–Here’s a hint:  The futures markets ARE TELLING YOU what forward expectations are.  Oh, then it’s simple, isn’t it?  The Fed should just start selling back month dollars and flip the calendars from negative to positive.  [Look Potter, I’ll put in a direct line, AND I’ll make sure to raise your commission by at least 2% every year].

–Anyway, it’s not just the Fed, the BOJ affirmed holding the ten year yield around zero as it tempered forward growth expectations in its quest for 2%, as slowing global growth hurts exports and output. The market’s response: “It’s not that we don’t believe you, but we just aren’t going to trade this stuff anymore.”  

–Jussie Smollett could build a more credible story.

And now, for something completely different


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

Solid 10y auction

March 13, 2019

–Yields dropped across the board yesterday with solid demand for yesterday’s ten-yr auction.  Tens fell over 3 bps to 2.605.  Euro$ contracts from reds through golds were up 3.5 to 4.5 bps.   Large trades occurred in TYK calls: initially an exit of 50k TYK 123/125 call spreads at 23 to 24 pre-auction, and then a sale of 80k TYK 123.5/124.5cs at 11.  The original positions were longs of ~50k each in 122.5/124.5cs and 123/125cs.  So the latter was exited and on the former, the top strike was rolled down to the 123.5 strike, leaving a long 122.5/123.5 cs which appears to be ratioed, as  there is now more open interest in 123.5 calls (126k) than in 122.5 calls (93k).  In any case, it appears these call spreads were anticipatory to buying the auction, and were unwound/adjusted as the auction occurred.  Yesterday’s settle in TYM at 122-28 was the highest since the spike high associated with stock market turmoil on Jan 3.  

–In euro$’s premium selling continues with back straddles losing 1-2 bps.  The long green 9762.5 straddle strip settled 282 with March about to roll off.  Recall that it was only about a month ago that the then atm 9750 straddle strip traded as high as 372.

–Bonds are bid, stocks are bid, oil is nearing a new high, even gold and silver are rebounding slightly.  GBP is higher this morning despite May’s loss yesterday, leaving another vote today on a no-deal Brexit.  

–In the US, PPI is expected +0.2 month over month, with Core yoy 2.6%.  Durables expected -0.5 vs last of +1.2.  Treasury re-opening auction of 30 year, as the bond yield tries to hold above 3%.

Posted on March 13, 2019 at 5:06 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Inflation? Not in commodities.

March 12, 2019

–Yields pushed a bit higher in response to the powerful rally in stocks.  On the eurodollar strip, the red pack (2nd year) was weakest, closing -2.75.  All red to deferred pack spreads made new lows, with red/green (-9.5s) right at the low made in early 2000.  A couple of large trades in euro$ options reflect a continued bias for a slowdown and future Fed easing.  Buyer of 50k EDM0 9850/9875 csll spread for 1.25 ref 9748.5 (settled 1.25 vs 9749.0).  Also 0EU/ 2EU 9775/9812 call spd spread, buyer of the green paying 2.0 over.  Settled 6.0 and 7.75 vs 9754.0 in EDU20 and 9761 in EDU21.

–Prime Minister May won a concession from the EU in an attempt to win today’s Brexit vote, further supporting GBP. 

–US news today includes NFIB (probably higher as Russell index has improved) and CPI, expected +0.2 with yoy Core +2.2.  Ten year auction today as well, followed by 30-yr tomorrow. 

–The bearish implications of last week’s outside ranges with lower closes in equity futures are being challenged this morning, most notably by Nasdaq.  The chart below is SPX divided by the BBG Commodity Index.  It’s a rough reflection of financial speculation.  Paper shares vs things (though perhaps meaningless in an UBER economy).  From the low in late December it’s up 13.9% and within spitting distance of the all time high set in Sept 2018 of 35.23.  As a comparison SPX is up 18.4% from the low close in Dec.  BCOM up under 6% as of yesterday close.  Since the low in 2011, SPX/BCOM is up nearly five-fold!

–I had thought part of Powell’s mission was the 3rd mandate of financial stability, which I interpreted as leaning against financial speculative excess.  Of course, he would also then have to lean against the PBOC, ECB, etc, all of whom want inflation and growth, without any risk of financial asset deflation.  When the liquidity spigots are open, the money flows into paper, not capex.  Maybe that’s why the ED curve is flattening…    

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