May 9. Emerging markets, stocks vs bonds

Below is chart of EEM in amber, the Emerging Mkt etf, vs EMB in white, the Emerging BOND etf.  I have no idea what the composition is of each of these; I only just learned there WAS an emerging bond fund.  Obviously, the Argentine bonds are exerting a downward influence in the bond etf… not much of a surprise there.

Just sort of interesting to see the divergence, and given that US corporates have been borrowing in order to fund stock buybacks (thus diluting balance sheets) it might be worth keeping an eye on this chart.  Will credit concerns pull stocks down?


Posted on May 9, 2018 at 9:34 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 9. Possible auction drama

–Trump exits the Iran deal, oil jumps $2/bbl to new highs, and stocks rally. Hmmm. Today brings the ten year note auction against a backdrop of heightened inflation concerns, in which oil plays a major role. Today’s PPI is expected +0.3 with Core +0.2. Tomorrow’s CPI is expected to print +2.2% yoy Core. With tens just above the relatively juicy yield of 3%, there should be decent demand. However, there’s a chance that increased supply will be overwhelming, and if there’s a continued pullback of foreign buying (low indirects) it could be quite negative going into tomorrow’s 30 yr.
–Big new trades yesterday, +60k TYM 118p 3. That strike represents around 3.15% yield. EDH9 9687p 2.0 for 100k vs 9720.5 to 22. Put settled 1.75 vs 9723 with open interest +65k. With a June hike priced into the FF market, and EDM8 hugging the 9762 strike, the EDH9 puts look like a simple play for continued hikes at every quarterly meeting going into the beginning of next year, with the possibility of an off quarterly hike thrown in. One other trade of note was a seller of EDU8 9750 straddle vs 9762c which was sold at 10.5 in about 40k.
–Implied vol firmed slightly but is still remarkably low given the chance of an inflation ‘breakout’. While TYM 118p seem far away, anyone needing downside protection would probably want to get it in place prior to the auction.

Posted on May 9, 2018 at 5:22 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 8. Consumer credit deceleration

–Late profit taking turns in both crude oil and stocks after Trump tweeted “I will be announcing my decision on the Iran Deal tomorrow [Tuesday] from the White House at 2:00 p.m.”  Oil slipped back below 70 and stocks ceded a few points as well.  The opening of the US Embassy in Jerusalem in one week, May 14, is another possible flashpoint.
–Light volume yesterday with no euro$ contract trading over 100k.  Yields were nearly unchanged, edging higher by 1 bp or less across the curve.  Treasury kicks off the auction cycle with threes today.

–Consumer Credit yesterday showed an increase of just $11.6b, below expectations of $15b.  Although this is likely just payback from storm induced buying last year, revolving credit has declined for the past 2 months, -0.6 in Feb and -3.0 in March.   Pretty ominous signal if it continues.  The total growth (including non-revolving autos and school loans) was 3.6% but that is showing deceleration as well.  In Q4 the rate was 6.9%, in January 4.7, Feb 4.3 and March 3.6.

–AAPL had a gap open to new highs yesterday as the public jumped on Buffet’s bandwagon.  However, I would note that Buffet said he would by more ‘at the right price’, which probably doesn’t mean new highs.  AAPL closed on its low on light volume, and left a gap from 184.25 to 184.75.  It appears likely that there will be a gap open lower today, leaving a potential island top. 


Posted on May 8, 2018 at 6:41 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 7. Rates sit as other markets fluctuate

–Crude oil above $70/bbl (CLM 70.42, +0.70) as the fate of the Iran deal looks increasingly shaky.  The dollar continues its surge with EUR 1.1925, having been as high as 1.24 in mid-April.  An article on ZH citing BAML notes that S Korean export growth turned negative,  a warning sign for global trade.
–Not much of a market move on Friday’s employment data.  Implied vol remains pinned at the lows without much of a catalyst in sight.  Stocks soared Friday and are a bit higher this morning.
–May euro$ midcurves expire Friday.  SOFR futures begin trading today.  Auctions of 3, 10 and 30 year treasuries may be a challenge this week.
–Back end of the dollar curve is flat, with green/blue pack spread (3rd to 4th years) at only 2 bps.  The six month spread EDZ0/EDM1 is inverted at -0.5.  All contracts through the golds behind EDH20 (which settled at exactly 9700) are within 10 bps of 3%, suggesting the market sees a ‘terminal’ FF rate of 2.5 to 2.75%, essentially 100 bps higher than the current Fed effective of 1.70.


Posted on May 7, 2018 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 6, 2018. As Good As It Gets

I was skimming the news sites Saturday morning and on the Wall Street Journal’s there was a long term chart of the unemployment rate which noted the last time the rate was this low (3.9%) was Dec 2000.  Let’s take a look back.


From 1995 to 2000 the FF rate bounced around between 4.75 and 6%.  In late 1997 the rate was 5.5%.  In Sept 1998 we had the LTCM crisis and by the end of the year the Fed had cut… to 4.75.  At the time, LTCM was a major crisis, threatening to bring down the entire financial edifice.  The Fed famously gathered the major financial players to arrange a bailout. By June 1999, Greenspan began to hike again, ending the year at 5.5%.  This was the dot-com era.  The turn of the century.  In February, 2000, the Fed hiked to 5.75, then to 6% in March, followed by a 50 bp dinger on May 16.  Eighteen years ago.  And that was the peak, 6.5%.


Amusingly, a CNN/Money piece at the time noted, “[The Fed] also gave an onerous hint that it will implement more rate increases in the months to come if need be to ensure the now-record economic expansion continues forward without stumbling.”  Why, that’s just what we’re being promised now.


The article is quite an interesting throwback.  Here’s a snippet, which could have been written today:


What concerns Fed officials is that that mix may be starting to end. The sizzling U.S. job market has spurred employers to start doling out higher wages and benefits to workers to keep them from leaving. And those workers, armed with bigger paychecks and pleased with the gains they’ve made investing in stocks and real estate, have continued to spend in the face of rising rates — something that has begun to give some retailers the green light to begin lifting prices.

Even so, overall inflation still remains remarkably subdued.


Well perhaps it’s not exactly the same as today, but an article on Bloomberg notes some of the same conditions, for example, the Q1 Employment Cost Index showed private-sector wages posted the strongest yoy gains of this expansion.


The unemployment rate had been in decline going into the year 2000, and throughout that year remained between 4.1 and 3.8%.  By January of 2001 it was 4.2% and never looked back, marching higher into 2002.  Stocks were on a tear going into the turn of the century, with Nasdaq surpassing 5000 for the first time in March 2000.  SPX had broken through 1500, but topped out just above that level in August.  In terms of the curve, the red to gold ED pack spread declined as the Fed hiked, inverting below zero in March.  After the May hike, the curve bottomed, and a year later was 100 bps as the Nasdaq bubble rapidly deflated.  Red/gold has also declined during this current hiking cycle, having made a new low in the middle of last month at 8.25 bps.


Both then and now, the sub-4% employment rate begs the question: Is this as good as it gets?


In 1997, Jack Nicholson starred in a movie of the same name. He played Melvin Udall, an obsessive-compulsive romance novelist who rudely insults almost everyone he meets.


There’s a line in the movie that reminds me of our current US government.  Jackie, the starry-eyed receptionist who is a fan of Melvin’s romance books breathlessly asks him, “How do you write women so well?”  Melvin responds, “I think of a man. Then I take away reason and accountability.”


Might as well ask, how does the American government manage its financial affairs?  With trillion dollar deficits looming, there doesn’t seem to be much in the way of reason.  And in the old days, perhaps the bond vigilantes would force accountability.  No longer.  However, we may get a taste of the old medicine as the treasury auctions 3s, 10s and 30s this week.  These three auctions are supposed to raise nearly $34 billion in NEW cash.  Rates barely moved Friday, or, for that matter, on the week.  Net changes across the curve were within 2 bps, with tens -1.3 to 2.944%. Will we see a concession this week?  Besides the auctions, we’ll get inflation data on Wednesday and Thursday (PPI and CPI), and Trump’s expected refusal to extend the Iran deal.  As an interesting side note, this week’s Bank of England meeting is now leaning toward no change in rates, an abrupt reversal from previous guidance.  As Barclay’s notes (from a Reuters article) “Resetting communication after sitting out a rate hike will be an uphill task for the Monetary Policy Committee.”


The takeaway is that central banks, with all of the financial data and analysis at their fingertips, often have a hard time identifying turning points.  It was true in 2000, and in 2007.  Flatness in the back end of the curve is telegraphing the possibility of economic weakness towards the middle or end of next year, and increased treasury supply may accentuate a move toward tighter credit conditions.  Maybe this IS as good as it gets.



Note: the CME begins trading SOFR this week.  The NY Fed site has daily data at

On the CME website see:


4/27/2018 5/4/2018 chg
UST 2Y 248.0 249.7 1.7
UST 5Y 279.9 278.0 -1.9
UST 10Y 295.7 294.4 -1.3
UST 30Y 312.5 311.4 -1.1
GERM 2Y -57.8 -58.0 -0.2
GERM 10Y 57.1 54.4 -2.7
JPN 30Y 73.0 72.7 -0.3
EURO$ Z8/Z9 33.5 32.5 -1.0
EURO$ Z9/Z0 8.5 5.5 -3.0
EUR 121.31 119.63 -1.68
CRUDE (1st cont) 68.10 69.72 1.62
SPX 2669.91 2663.42 -6.49
VIX 15.41 14.77 -0.64


Posted on May 6, 2018 at 1:04 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 3, 2018. Dry

–Utter lack of drama associated with both the treasury refunding and the FOMC announcement. Yields barely changed on the day. The financial press focused on Tesla’s earnings call, and Musk’s terse cut-off of inquiries. “Sorry,” Musk said, “these questions are so dry. They’re killing me.” I guess Musk wants analysts to reflect on the big picture of really cool design and technology, and keep pesky issues like HUGE CASH BURN under the floor mats. Could it be that this second topic wends its way into the more general economic discussion? How patient are creditors given low yields? There was a story yesterday that *gasp* Argentina’s 100 year bond was under water as the currency tanks. So forgiving and yield-starved were the capital markets that Argentina easily floated 100 year bonds. That was then…
–Well, Elon, you don’t like dry and boring? Then stay away from interest rate options. (And, for that matter, avoid presentations on SOFR). Yesterday straddles continued their descent. Seller of 100k 0EM 9712.5p at 5.5 caused 0EM straddle to settle 11.5 from 12.5. Total of 121k open interest evaporated in 0EM puts alone (72k in the aforementioned 9712 strike). The shorts are throwing in the towel. USM up a few ticks and the atm call sat unchanged, with all the damage accruing to the puts.
–Today’s news includes Factory orders expected +1.3 and ISM Services at 58.4. US trade delegation in China.

Posted on May 3, 2018 at 5:26 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 2. Refunding

–Breakout of the dollar continued with DXY and EUR through 200 day moving averages.  Stocks had a nice run both before and afterAAPL’s earnings. Fifteen mins prior to cash close AAPL was 168.90, ESM 2647.00 and NQM 6666.00.  As of this writing ES is 10 points higher while Nasdaq is 59 higher.  July Corn also appears to be breaking out to the upside, trading 405 late.

–Interest rates were quiet, with flows dominated by premium selling. Yields rose with the ten year +4 bps to 297.4.  Near ED calendars posted new highs.  EDM8/EDM9 closed 51.0, +3 on the day as interest in 0EM puts continues prior to the employment report.  EDZ8/EDZ9 closed at 35, not a new high, but just above the heavy selling level of 34.5 seen last week.

–Today’s news includes the Treasury refunding announcement at 8:30 (a likely contributor to higher yields) and the FOMC meeting in the afternoon.

–Interesting trade late in the day was a new buyer of 80k 0EU/2EU 9737c calendar for 0.5 covered 9702.5 in EDU9.  EDU9/EDU0 spread is 10.5 and both options settled 3.25.  Trade works on a roll up, and possibly on a change in Fed perceptions (an end to tightening).  As a comparison, 0EM 9737c settled 1.0 and 2EM 9737c 0.5.

–Interesting speech by BOC Poloz yesterday, outlining concerns about high debt levels while still looking to raise rates.  This line sort of sums it up for the developed world, and is something Dudley has also mentioned/warned about.  “Remarkably, the aggregate debt-service ratio on mortgages for Canadian households has been very stable, remaining within a range of 5 to 7 % since the early 1990s.  What this means is that Canadians have taken advantage of lower interest rates to carry a higher level of debt, thereby keeping the debt-service ratio fairly constant.”  In other words, it’s a heavily debt-laden, cash flow dependent economy that has a hard time withstanding rate increases.

Posted on May 2, 2018 at 5:25 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

May 1, 2018. “There is a lot of supply”

–Even the Drudge Report is highlighting concerns about Treasury buying, with one linked article to Bloomberg (US borrowed record $488b in Q1), and one linked to WSJ reporting that indirect auction bids (which often represent foreign buying interest) are dwindling.  From BBG:
“It’s a very large, robust market — it’s the most liquid market in the world, and there is a lot of supply,” he [Mnuchin] said in a Bloomberg TV interview on Monday. “But I think the market can easily handle it.” Earlier on Monday the Treasury said net borrowing totaled $488 billion from January through March, a record for that period and about $47 billion more than it had previously estimated…”

–By the way, the last time borrowing was this large was 2008, during the crisis.  Now the borrowing comes at a time of slightly accelerating inflation amid domestic stimulus and risk of trade wars.  Sure, the market can handle it, but at what yield?

–Month end buying and jitters related to Netanyahu’s speech on Iran caused bull flattening on light volume.  As is often the case, premium sellers like the flatter curve.  Bund vol closed at or near an all time low at 3.2.  Treasury vol also weakened.  Notable selling of EDZ8 9737/EDH9 9725 straddle strip at 49.5 (had settled 50.5 Friday). The entire strip of ED straddles lost 0.5 to 1.5 bps.
–USD continues to strengthen this morning with EUR at new recent low of 120.35.  Negative for commodities, but also a headwind for stocks.

–Headline PCE prices hit the Fed’s 2.0 target, but yoy Core just missed at 1.9%.  Today we get ISM Mfg, expected 58.6, which also include price data.  As can be seen on the attached chart, last month’s 78.1 was the highest since 2011.  Today it’s expected 78.5.


Posted on May 1, 2018 at 5:15 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Supply Tantrum? Weekly, April 29, 2018

US Ten year yield tops 2% as Bernanke says Fed may taper buys

–Bloomberg headline on May 22, 2013, following Bernanke’s Congressional testimony.  The start of ‘The Taper Tantrum’


The program relates the flow of asset purchases to the economic outlook. As the economic outlookand particularly the outlook for the labor marketimproves in a real and sustainable way, the committee will gradually reduce the flow of purchases.”


Just about 5 years ago, Bernanke sparked the taper tantrum on May 22, and added further fuel in the FOMC press conference of June 19.  By the end of 2013 and into the beginning of 2014, the ten year yield had soared to just over 3%, a level that was finally revisited this week.  As the chart below indicates, the yield level in the beginning of 2013 was quite low, 1.60% – 2.0%.


This week, the long round-trip to 3% was completed.  Looking at the chart, one might be tempted to say we’re at the top of the range, time to sell.  Indeed Citi did just that, recommending entry at 3% with a target of 2.65%.




There are a lot of longer term indicators which suggest that yields SHOULD come back down.  For example, yoy M2 growth has been falling consistently, suggesting a slowdown. Annualized growth has gone from a rate of 7.25% in September 2016 to just below 4% currently. (Chart at bottom).  Commercial and Industrial loans tell a similar story.  C&I loan growth peaked in Dec 2014 at 12.6%, versus the most recent mark of 2.6%.  The low in November last year was a pace of only 0.5%.  The tax bill with immediate capital depreciation and other stimulus is likely causing loan growth to bounce; the broader point is that some factors suggest economic deceleration.  Additionally, while the early part of the hiking cycle was ironically associated with looser financial conditions, tightening is now becoming apparent across markets.  Dudley relates financial conditions to short and long term rates, the value of the dollar, stocks, and corporate spreads.  Both short and long rates have made new highs, while the curve has flattened.  The dollar rallied this week and appears to have bottomed.  Stocks have dipped.  While junk bond spreads remain tight, flows into HYG and JNK etfs have slowed.  Below is a chart showing BBB spread to treasuries and it has turned higher since the start of the year. (Corporate spreads may stay relatively tight just because of the vast amount of gov’t supply).  Tighter conditions will take a bite out of forward growth.


However, there are many shorter term issues that will likely dominate the direction of yields in the near term, and many of those are bearish.  For example, on Monday, PCE prices, which is the Fed’s preferred inflation measure, is released.  Both headline and core are expected 2.0%, finally at the Fed’s target.  Powell and many others have talked about calendar effects which will support inflation data going forward.  Here’s a snippet from last year regarding mobile phone service prices:  “Paul Ashworth, chief U.S. economist at researcher Capital Economics, recently explained ‘that nearly half of the decline in core CPI inflation this year can be traced to a single item: wireless telephone services’.”  From the same article, “Per Labor Department statistics, mobile plan prices dropped nearly 9%  between March and April, and since April 2016, service prices are down nearly 13 %.”  These price drops are now falling out of inflation comparisons.  Last month Core PCE Prices were 1.6%.  On Monday, the expectation is 2.0%.  If it hits, it will be the highest since 2012.  Will the market shrug it off?  Perhaps, but consider other factors…

First, WTI Crude closed around $68, near the high of the year.  Last year in April it was around $50/bbl.  On May 12, Trump will decide whether to continue suspension of sanctions on Iran.  Renewed sanctions will likely be associated with a drop in global oil supply and even higher prices.  Inflationary.


Second, everyone knows that employment data is generally strong.  This was underscored by last week’s historic low in jobless claims of only 209k.  ECI  was +0.8 last week, more than expected.  From Bloomberg: “Employment cost index rose 0.8% q/q (est. 0.7%); after 0.6% gain. Wages and salaries advanced 0.9% q/q; benefits costs climbed 0.7%. Total compensation, which includes wages and benefits, climbed 2.7% over past 12 months, strongest since 3Q 2008, after 2.6% gain. Private-sector wages and salaries advanced 2.9% y/y, also the largest since 3Q 2008, after rising 2.8%.”  This Friday the Employment report is released, with NFP expected 190k and Avg Hourly Earnings +2.7% yoy.

Third, the treasury releases the quarterly refunding schedule this week.  Supply is expected to be huge, and, as I mentioned last week, the amount of new cash simply associated with the 3, 10 and 30 year auctions next week starting May 8 is expected to be $33 billion out of the $72b to be auctioned.  That money has to come from somewhere.  How about a yield concession?  This is probably childishly simplistic, but the Chinese may say, ‘why should we recycle our trade surplus into US treasuries so that the US can deficit-spend to build up its military?  Why don’t we focus on building OUR military capabilities for control of the South Sea, etc.’

The point is that there are a lot of potentially bearish news items for bonds in the next two weeks.  It wouldn’t surprise me to eventually get back to 2.65%, but I would say it’s more probable that 3.25-3.33% is reached first.  The original taper tantrum caused a yield surge in tens from 1.60 to 3.00, a total of 140 bps.  This year’s Supply Tantrum(p), could be marked by a yield move of similar magnitude. Last September’s low was just over 2%, so an increase of 140 bps would target 3.40/3.45. The 50% retracement from the high yield in 2007 of 5.30% to the low in 2016 of 1.36% is 3.33%.

Obviously a big break in stocks could shift the tide of funds into bonds.  While Amazon reported blow-out revenue of $51 billion (+43% yoy), Nasdaq was nearly unchanged Friday.  Big tech isn’t causing growth, it’s cannibalizing other companies.  Additionally there has been notable weakness in financials, with many big banks just barely rebounding from late March lows (example, IYF, i-shares US Financials).

The treasury refunding announcement is on Wednesday morning at 8:30; the FOMC announcement is Wednesday afternoon. If the PCE price data are strong, then there could be a slight upgrade in language regarding inflation, otherwise there is little reason to expect a change.


Week to week changes across markets were rather small.  On the week, 10’s rose just 1 bp to 2.957.  SPX barely changed.  Same with crude oil.  It’s no wonder that vol slipped.  I include a TY vol chart which shows we are close to multi-year lows, a rather surprising reversal from the VIX blow-up earlier this year.  I actually marked USU vol sub 7%.  The USU put seller added to his position, and although underwater on the initial 143 put sales, the 139 puts sold last week at 1’23 to 1’20 settled at 0’61. Several analysts (DB, BAML) suggest that odds of a debt inspired crisis are increasing for the US.  Of course, this would be a longer term, low probability event, but still suggests that implieds are too low in treasuries.


4/20/2018 4/27/2018 chg
UST 2Y 247.5 248.0 0.5
UST 5Y 279.5 279.9 0.4
UST 10Y 294.7 295.7 1.0
UST 30Y 313.8 312.5 -1.3
GERM 2Y -56.1 -57.8 -1.7
GERM 10Y 59.1 57.1 -2.0
JPN 30Y 73.1 73.0 -0.1
EURO$ Z8/Z9 34.0 33.5 -0.5
EURO$ Z9/Z0 7.0 8.5 1.5
EUR 122.89 121.31 -1.58
CRUDE (1st cont) 68.40 68.10 -0.30
SPX 2670.14 2669.91 -0.23
VIX 16.88 15.41 -1.47

Posted on April 29, 2018 at 8:38 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

April 27. Q1 GDP today. Stocks have muted response to good earnings

–General rebound in markets yesterday, with stocks rising on light volume and the ten year yield edging back below 3%.  (closed 2.99).  There continues to be selling of USU puts, with new sales yesterday of 139 puts at prices of 1’20 to 1’23.  The initial sales of the 143 puts were at the same level ref 145-18ish.  USU 143 puts settled 3’09 and 139 puts settled 1’19 vs US 141-17.  The recent rally in vol was erased.

–Jobless claims were only 209k, extremely low.

–Today’s news includes ECI expected +0.7 and Q1 initial GDP estimate, pegged at 2.0 with Prices +2.2.  Atlanta Fed GDP Now is also at 2.0 and NY Fed’s Nowcast is 2.9.

–As mentioned in yesterday’s comments, the big US to German yield curve 5/10 yr spreads appears to have been an exit of 10y US/Bund spread, and moved up the curve to FV vs Bobl.  As shown on the chart below that spread is at a new high of 284.

–Once again there was a late seller of 40k EDZ8/EDZ9 spread at 34.5, which is where it settled.  The other day there was a good size block sale at the same level which was an exit.

–The other aspect of yesterday’s trade was a breakout of EURO, where USD is strengthening. DXY now nearing the high of this calendar year. Likewise with EUR which was 121 at the end fo the day.  Next big support is 200 dma at 120.08.

Posted on April 27, 2018 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options