Escalation

May 10, 2019

At the end of March, yields took a dive.  German manufacturing PMI had come in at just 44.7.  Kudlow went on CNBC and called for a 50 bp rate cut.  The market was clearly positioned wrong, and the fixed income rally was vicious.  For example, EDM20 traded as high as 9797 and EDM21 as high as 9795.  Yesterday’s closes were 9776.5 and 9787.0.  At the time, stocks had a relatively small pullback, and VIX traded to around 17.5.  On the current pullback in stocks, VIX has spiked above 20. but the rally in fixed income has been much more measured as the Fed has tempered expectations of an immediate ease. Even with the escalation of the trade war with the imposition of new tariffs on China, rates are behaved.  In late March, near one-year ED calendars traded -38 to -42. now the first three one-yr spreads are -28 to -29.  The bias is clearly for rate cuts, but the market is more balanced.

–Yesterday the ten year fell  3.1 bps to 2.451% while reds through golds rose 3.0 to 3.5 bps.  Trump imposed new tariffs today, but the market appears to believe an 11th hour deal with China will still be struck.  SHCOMP rose 3%.  

–News today includes CPI expected +0.4 with Core +0.2, and yoy Core +2.1.  Bostic speaks about the economic outlook (he had previously expressed concerns over curve inversion. and we now have 3m bills around 2.38 and tens 2.45).  UBER IPO today.–May midcurve options expire with atm 0EK and 2EK straddles settling 6.0 yesterday, relatively high.  

Posted on May 10, 2019 at 5:23 am by alexmanzara · Permalink
In: Eurodollar Options

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