Jan 30. Lack of FOMC urgency

–FOMC announcement today.  Since the time Powell indicated patience and flexibility, the dollar index is about unchanged.   Oil and broader commodity indices have rallied this month but remain below levels from early December.  The ten year note to inflation indexed tip is around  177 bps now, vs close to 200 bps at the beginning of December.  The lowest one-year euro$ calendar spread is EDZ9/EDZ0 at -17, just above the current Chicago air temp of -19 farenheit.  FF contracts indicate little chance of a hike at the next three quarterly FOMC meetings (the May/July spread which isolates the June FOMC settled 3 bps, a slight tilt towards a possible hike).  The March/June euro$ spread likewise settled at 3.0.  Stocks are about halfway back from Q4’s plunge, which I suppose is consistent with the idea that balance sheet run-off will be tapered.  There’s really nothing that suggests urgency to act; inflation expectations have fallen and growth will be negatively impacted by the gov’t shutdown.  A schedule to trim QT can be kicked down the road to March.  If concrete measures were announced today to slow QT significantly, then stocks would likely react favorably with a minor negative impact on fixed income.   

–In euro$’s yesterday 3EU 9800 calls continue to be liquidated at 5.0 ref futures 9738 to 41.  Over 100k traded with open interest down 50k, settled 5.0 vs 9741.5.  Red/green pack spread settled at a new low of -8.125, down 0.625 yesterday. This, I believe, suggests the market perceives the central bank as “tight”.  As mentioned over the weekend, this is below the low of the 2004/06 tightening cycle, and just 1.25 bps away from the lowest level of this century, set in March 2000 at -9.375.  From this standpoint, it might make sense to look at buying the last reds to last greens, or first greens to first blues (though there’s obviously negative roll).  EDU0/U1 settled -5.5 and EDZ0/Z1 -3.0.  In fact, late yesterday there was a buyer of 2EH 9762c vs 3EH 9762c. This spread settled 1.0, 5’s and 4’s.  

–AAPL’s earnings report was rec’d favorably, having had expectations beaten into the dirt beforehand.  Today MSFT and FB report.  

Posted on January 30, 2019 at 4:58 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Interest rate markets are frozen

–Yields were unchanged to slightly lower after 2 and 5 year auctions yesterday.  The largest trade of the day was a sale of 100k 3EU 9800c at 5.5 to 5.0 vs EDU2 9736-38.  The CME’s open interest sheets indicate that OI was UP 4k contracts which is quite odd since there had clearly been a buyer amassing these calls, growing the position to 245k contracts.  Implied vol pinned to low end of range.  3EZ 9737 straddle which was heavily traded at 51 on Friday settled 49.5.

–Today includes the 7 year auction and post-close results from AAPL.  Tomorrow FB and MSFT report, followed by AMZN on Thursday.  Yesterday both CAT and NVDA were clobbered after earnings reports, with the latter looking to re-test December’s low.  Amazingly, NVDA lost nearly 60% of its value from the start of October to the end of the year!  At least part of the previous rally was due to high demand for processors related  to crypto-mining.  Is all the bad news out?  

–Employment data is Friday.  Add into the mix that the US is leveling criminal charges and seeking extradition in the Huawei case, just as important US / China trade talks are scheduled Wednesday and Thursday.  FOMC announcement is Wednesday afternoon.  

–It’s polar vortex time in Chicago, which when coupled with recent snowfall, means a parking ban is in effect when you see lawn chairs holding a spot.  Voting patterns indicate a generosity of spirit with respect to income distribution in Chicago, but if you try to take the spot that I labored to shovel out, you’ll return to find your car encased in ice from the garden hose.  And it freezes quickly in these conditions.

It LOOKS inviting….

Posted on January 29, 2019 at 5:06 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

The Sellsword

At the December 19 FOMC, Powell said: “I think that the runoff of the balance sheet has been smooth and has served its purpose.  I don’t see us changing that.”  He added, “We’re alert to these issues, watching them carefully.  We don’t see the balance sheet runoffs as creating significant problems.”

On the following Friday, Dec 21, Williams, interviewed by Steve Liesman said, “…if there’s a material deterioration in the economic outlook, obviously we will reconsider our path for the short term interest rate and would adjust policy to best achieve our goals.  But we also said we would reconsider the balance sheet normalization and may even end that process…if that’s appropriate to achieve our goals.” 

In my weekly note at the time (Dealings of my trade, Dec 23) I wrote, ”I think the Fed will deliver an ‘ease’ by the beginning of next year, in the second quickest turnaround since the crash of 87.  They will probably try to wait for the January 30 FOMC.  Using the cover of enormous treasury supply, the Fed will announce either a trimming of the balance sheet reduction to something like $20 billion per month, or a complete cessation, most likely the latter.”    

On January 4, Powell, at the American Economic Ass’n, promised that the Fed would “…be prepared to adjust policy quickly and flexibly and to use all of our tools to support the economy…” which was a signal the Fed was on hold in terms of rate hikes.  With respect to the Fed’s balance sheet, he said at that time, “We don’t believe that our issuance is an important part of the story of the market turbulence that began in the fourth quarter of last year.  But, I’ll say it again, if we reached a different conclusion, we wouldn’t hesitate to make a change.”

In my weekly note on Jan 7 (Flexibility) I wrote, “…the Fed has certainly bought time until the January FOMC to determine if changes need to be made.  My guess is that they WILL tweak the balance sheet schedule at the January meeting unless there is concrete progress made in China trade negotiations.” 

Vice Chair Richard Clarida, on Thursday of the following week, Jan 10, echoed Powell and solidified the pause.  On balance sheet normalization: if it no longer promotes dual mandate goals “we will not hesitate to make changes.”   

Other Fed officials have kept to the same script.  Unsurprisingly risk assets levitated.  Then on Friday, Jan 25, we got the Wall Street Journal plant: ‘Fed Officials Weigh Earlier-Than-Expected End to Bond Portfolio Runoff- Next week’s meeting could yield more clues.’ 

So, the market now anticipates an end to QT.  Stocks surged on Friday, as did gold (new high for the year over $1300) and copper (looks to have found a bottom). SPX has reversed nearly all of December’s loss.  The Emerging Market etf, EEM has completely reversed the fall in December, as have junk bond funds HYG and JNK.  Not long ago, analysts were talking about financial conditions as a quasi ‘third mandate’ for the Fed.  Powell didn’t want asset prices to be the primary driving economic force.  However, the pressure generated by a sharp pullback in stocks has apparently cast Fed members under the spell of rising stocks as a magic elixir.  Having already guided the market to a pause in March with respect to the FF target, can the Fed stop balance sheet normalization in January cold-turkey? 

The first non-quarterly press conference this week promises to be a dilly. If the Fed were to trim the balance sheet run-off in January, it would be the fastest hike to ‘ease’ turnaround since 1987.  If Powell leaves the schedule as is and simply says the Fed is considering changes, what will the March FOMC look like?  A pause with an extra dollop of stimulus by cutting QT?  I assume the WSJ article was a part of the Fed’s communication strategy.  But it is threatening to backfire.  If the Fed ends balance sheet normalization, it’s an overt admission that they don’t understand the transmission effect.  If they hew to the schedule of $50 billion per month, the new risk is severe market disappointment.  The most likely outcome in my opinion is the announcement of a modified, decreasing quarterly schedule of run-off, in much the same way as QT was instituted. For asset prices, buy the rumor and sell the fact.  

In Game of Thrones, Varys poses a riddle to Tyrion: “In a room sit three great men, a king, a priest, and a rich man with his gold.  Between them stands a sellsword, a little man of common birth and no great mind.  Each of the great ones bids him slay the other two. ‘Do it’ says the king, ‘for I am your lawful ruler.’  ‘Do it’ says the priest, ‘for I command you in the name of the gods.’ ‘Do it,’ says the rich man ‘and all this gold shall be yours.’  So tell me – who lives and who dies?”

Which master shall the Fed serve?  Trump, Main Street, or Wall Street?  “Power resides where men believes it resides. It’s a trick.  A shadow on the wall.”  The Fed is holding the sword, but the struggle for alliances is getting messy, the message is becoming muddled.  By the way, Varys looks a lot like Uncle Fester of the Addams Family.  Don’t box yourself into the comedic role of Uncle Fester, Chairman Powell. 

Varys
Uncle Fester

It’s worth a mention as well that the PBOC is also taking incremental steps to ease.  For example, at the end of last week, the central bank announced a swap facility for perpetual bonds issued by commercial banks.  There perpetuities can be swapped for central bank bills.  I.e. switch long dated assets of dubious quality for fresh, short-term, top-credit bills to improve Tier 1 capital ratios and support the ability to lend more.  Liquidity transformation and transmission.  Draghi also tilted the balance of risks to the downside.

The ironic aspect of the Fed’s about-face regarding QT is that actual rate hikes could once again become more likely, especially if asset prices keep running.  Does the market indicate that?  Not really.  EDM9/EDU9 rose 1.5 on Friday to a new high of +1.5, but that barely shows sign of tightening concern.  May/July Fed Fund spread (which would fully capture a Fed move in June) settled 4.0, actually one bp lower than the previous Friday.  Aug/Oct FF settled +1.0. 

Interestingly, the red/green Eurodollar pack spread (2nd to 3rd year forward) had a low settle this week of -7.75 and closed at -7.5.  As the chart below shows, this is near the low since the turn of the century, and indicates a tight central bank, rather than one that is becoming increasingly dovish.  Other curve measures have declined, but aren’t quite probing new lows. 

Red/green euro$ pack spread since 2000

The market seems to be saying that the Fed is essentially out of the picture, and we’re still ‘on’ for recession about a year from now. 

Debt Ceiling

On March 1 the government’s suspension of the debt ceiling limit ends.  Various estimates expect the deficit to be about $22 trillion at that time.  According to a recent paper (great read and summary)  by Andreas Steno Larsen and Martin Enlund, come March, the Treasury will begin withdrawing its cash balance at the Fed, “…as they cannot hold an ‘above normal’ liquidity buffer ahead of the expiration of the debt ceiling suspension.  The commercial banking system will be on the receiving end of this USD liquidity, which should be temporarily positive for risk appetite.”  The authors anticipate a weaker dollar and tighter libor/ois as a result.    

https://e-markets.nordea.com/#!/article/47454/week-ahead-earnings-recession-time

In terms of debt, the treasury is cramming heavy issuance into the early part of the week prior to Wednesday’s FOMC.  On Monday, $40b 2-yrs and $41b 5-yrs are auctioned.  On Tuesday, $20b 2yr FRNs and $32b 7-yrs.  FOMC on Wednesday and Employment data Friday. 

1/18/2019 1/25/2019 chg
UST 2Y 261.2 259.8 -1.4
UST 5Y 261.8 258.7 -3.1
UST 10Y 278.2 274.9 -3.3
UST 30Y 309.4 305.9 -3.5
GERM 2Y -58.1 -58.0 0.1
GERM 10Y 26.2 19.3 -6.9
JPN 30Y 69.3 65.2 -4.1
EURO$ H9/H0 2.5 1.0 -1.5
EURO$ H0/H1 -10.5 -12.5 -2.0
EUR 113.64 114.13 0.49
CRUDE (1st cont) 54.04 53.69 -0.35
SPX 2670.71 2664.76 -5.95
VIX 17.80 17.42 -0.38

https://www.thebalance.com/u-s-debt-ceiling-why-it-matters-past-crises-3305868

http://www.atimes.com/article/peoples-bank-of-china-to-launch-central-bank-bills-swap/?utm_source=The+Daily+Report&utm_campaign=09be88dd42-EMAIL_CAMPAIGN_2019_01_25_01_31&utm_medium=email&utm_term=0_1f8bca137f-09be88dd42-31564993
https://www.zerohedge.com/news/2019-01-25/china-quietly-announces-quasi-qe-keep-ponzi-scheme-afloat
Posted on January 27, 2019 at 1:01 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Chill

–Yields fell and curves flattened as Wilbur Ross threw cold water on a trade deal, the gov’t shutdown continues, and Draghi noted a shift in risks to the downside.  Tens fell 4.3 bps to 2.71% with 2’s down 2.7 bps to 2.56% (2/10 at 15.0).  Blues were strongest on the euro$ curve, closing up 5.75.  Reds to deferred made new lows, with reds/greens now -7.75 bps (that’s year 2020 to 2021).  

–At the start of October Jay Powell said “we’re a long way from neutral”, but by late November had modified his stance to “we’re just below the neutral range”.  Yesterday Ross said we’re “miles and miles” from a trade resolution with China, which, I think, is even farther than a long way.  But I don’t get the sense that Wilbur is nearly as flexible as the Central Bank.  Therefore, the markets look more to the Fed as the only sensible game in town, which is to say, a provider of liquidity.  It seems like the gov’t shutdown is nearing an end one way or another which is likely a net positive, but the main show should be the debt ceiling increase.

–The euro took a tumble as Draghi mentioned downside risks.  Having been above 1.15 in early Jan it’s now at the lower end of its three month range at 1.1330.  EURGBP at the bottom of its range over the past 5 quarters; plunged from .9050 in mid-Jan to .8619 this morning.  Spreads in euribor that had been signaling forward rate hikes compressed.  For example, ERH1/ERH2 closed at a new recent low of 26 (from 29 Friday).

-On the short end of the curve, May/July FF spread closed Friday at 5 bps, indicating an increased chance of a hike in June after a March pause, but yesterday that spread fell to 1.5.  On Friday, EDH9/EDH0 was +2.5 and yesterday settled -4.0.  –Monday brings 2 and 5 year note auctions, with 7’s on Tuesday.  FOMC announcement and press conference on Wednesday. It’s -1 F/ -18C in Chicago.  Time for a brisk walk to the train…

Posted on January 25, 2019 at 5:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Jan 23. Kudlow rides to the rescue

–Last week’s stock market euphoria and related weakness in treasuries reversed Tuesday, with stocks lower and rate futures higher.  The ten year yield fell 5 bps to 2.732% while the red euro$ pack was +7.125 (strongest part of the curve).  The one-year calendar EDH9/EDH0 plunged 6 bps from +2.5 on Friday to -3.5 yesterday.  Existing Home Sales were the lowest in three years.  Some of the price action was related to China headlines:  early the FT reported that US/China talks had stalled due to intellectual property issues (stocks lower), then later in the day Kudlow denied any interruption in talks.  ESH immediately rallied to 2633.50 and then pulled back, but bounced again to 2635.50.  Currently holding above this level at 2639.00. 

–Volume remains light, but with February treasury options expiring Friday, there were some rolls of long TYG calls into Week-1 February.  Week-1 expire Feb 1. unemployment day, and the data WILL be released as the BLS is funded.  Open interest in week-1 TY calls rose over 60k, primarily in the 121.5 strike(+25k).  About a year ago, there was always buying of high gamma midcurve euro$ PUTS prior to NFP, now maybe shifted to high gamma CALLS further out on the curve.

–Good read from the MacroTourist:https://www.themacrotourist.com/posts/2019/01/22/australia/

Posted on January 23, 2019 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Stability based on confidence

Jan 20, 2019

Markets continued to rebound in the month of January, primarily in response to words of encouragement from the Fed.  Stocks powered to new highs for the year, as did crude oil, as did copper as did treasury yields.  However, against the backdrop of strong labor conditions underpinning the domestic economy, renewed ‘risk-on’ characteristics  could spur the Fed to moderate or even reverse the dovish talk that followed the late December plunge.

Interest rate curves are now starting to foreshadow caution about the possibility of a switch back to a tightening bias after a March pause.  Near Eurodollar calendar spreads closed at the highs for the year.  Most notable is EDH19/EDH20 which settled 2.5 bps, a rally of 13 bps on the week, and nearly 30 from the low of the year which was set at -27 on January 3.  On the FF curve, the February/April spread, which indicates odds of a Fed hike or ease at the March 20th FOMC, settled at zero (both contracts at 97.595, essentially locked at the current Fed effective rate of 2.40% so there’s the ‘pause’).  However, the May/July spread, which prices odds for the June 19th FOMC has popped up to 5 bps, signaling a 20% chance of a June hike.  Then for September, the August/Oct spread is 0.5.  The pricing is somewhat odd, though considerations with respect to t-bill supply may be figuring into some of these spreads, as a debt limit fight gets underway.  As the debt-limit deadline draws closer, bill supply may be suspended, only to come flooding back as an agreement is reached.  Mid-August is supposedly the drop-dead date.

Further back, the curve flattened.  The red pack (second year) has led the interest rate curve lower falling 13.25 bps this week.  The red/blue pack spread (2nd to 4th years) once again inverted, closing at minus 1, a new low for the past month.  In treasuries on the week, 2’s gained 6.9 bps, fives 9.4, tens 8.5 and bonds 5.9.  There’s been a marginal decline in inflation expectations/ term premium as a tightening bias re-emerged.   

With the Martin Luther King holiday Monday and a sparse economic calendar, the market’s pendulum should barely swing this week.  However, the continuing government shutdown could begin to take a greater toll on growth prospects, as Brainard warned this weekend.  Here’s a quote (unrelated to Brainard) that caught my attention:

One senior Republican Senate staffer told me he could envision the shutdown lasting until March, when federal funding dries up for food stamps—a crisis that would be hard for Washington to ignore. “Not only are there going to be a lot of hungry families,” he said, “but there are going to be a lot of Walmarts and Safeways and Krogers that are missing revenue.”

And here’s a small ‘congratulatory’ note from Martin Armstrong regarding Alexandria Ocasio-Cortez being placed on the Financial Services Committee chaired by Maxine Waters:

We can count on wild and crazy statements coming from this committee that will disrupt the world economy and confuse the hell out of people.  It certainly appears with every step we take, we are moving in the direction of a complete collapse in confidence.  I can’t imagine the bond market will survive comments coming from these two pillars of financial stupidity.

Of course, that’s a bit over the top (as there are more than TWO pillars).  But the point about confidence in the US treasury market may be getting uncomfortably close to the mark given 1) the current shutdown 2) expected fireworks for the debt-ceiling limit 3) an increasing budget deficit.  Bloomberg ran a story this weekend noting that the composition of auction buyers has shifted towards domestic private buyers who are more yield sensitive:   

America’s $15.6 trillion government-bond market — the world’s largest and most liquid — isn’t necessarily losing customers. But the biggest growth in demand is coming from the private sector, rather than the public side. That matters because if these price-sensitive buyers start pushing for better rates, it could help drive up the average interest rate on the nation’s debt, which is already close to a nine-year high. [link at bottom]

I want to turn now to a brief discussion of US Household (HH) Sector finances.  On and off there are strident warnings about credit card debt or student loans in the press.  But if there’s a crisis lurking around the corner, it’s not likely to be sparked by outlandish HH borrowing, it’s more likely to come from the corporate or government sectors.  After the crisis, private debts were shifted onto the government’s balance sheet.  Now, household obligations are being shifted to the business sector.

The chart below is a bit hard to see, but it’s from the St Louis Fed: HH debt as a percent of GDP.  In the crisis, HH debt to GDP was near 100% but it’s been around 80% since 2015. 

In terms of the Debt Service Ratio or DSR, a subset of the Fed’s HH Financial Obligation Ratio, it has fallen to a record low (since the data began in 1980) of 9.82% of Disposable Personal Income as of Q3 2018.  It’s a surprise to many people, but the outstanding level of mortgage debt to households has not yet exceeded the high of late 2007 at $10.625T.  As of Q3 2018. ELEVEN YEARS LATER, it’s $10.274T.  (Green line on the chart below).  The DSR is composed of Mortgages and Consumer Credit.  The mortgage part is also at a record low 4.24%.

It’s pretty clear that the HH sector has morphed into a class of renters rather than owners.  For homeowners, the average percentage of home equity has gone from 59.5% in 2005 down to a low of 36.5% in 2009 when prices dropped, back to 59.9% now.  But the public is now leasing apartments and cars, which, in a way, shifts the ultimate debt burden off the HH sector to the Business/Corp sector.  The total HH Financial Obligation Ratio (which is the Debt Service Ratio PLUS Rent, Auto leases, Home insurance and Property Taxes) has been more stable and is now 15.29% of Disposable Personal Income.  This is still historically on the low side, [link to data at bottom] but it’s not at a record low.  The point is, it’s much easier to walk away from an apartment or auto lease than it is a mortgage or auto loan. As the chart below shows, New and Existing Home sales turned down in 2018 as higher rates filtered through.  Home prices are no longer increasing due to lower financing rates. 

The conclusion of this section is a reminder of the old adage, if the bank loans you $100,000 and you can’t pay it, then YOU have a problem.  But if the bank loans you $100,000,000 and you can’t pay it, the BANK has a problem.  The finances of the HH, wage-earning sector look pretty good.  Even student loans that aren’t being serviced are probably more of a problem for the government (which owns the majority) than the debtors.  At the margin, there is now less certainty that contracts/leases (which are now shorter in length and don’t involve the loss of equity) will be honored in a downturn.  In turn there’s less certainty of investor demand for loans at a given rate.  Foreign governments building USD reserves are likely a more stable source of treasury demand than ETFs.  Horizons are shortening throughout the system.  If confidence really does begin to erode, the big unwind might happen quickly.

1/11/2019 1/18/2019 chg
UST 2Y 254.3 261.2 6.9
UST 5Y 252.4 261.8 9.4
UST 10Y 269.7 278.2 8.5
UST 30Y 303.5 309.4 5.9
GERM 2Y -58.7 -58.1 0.6
GERM 10Y 23.9 26.2 2.3
JPN 30Y 69.6 69.3 -0.3
EURO$ H9/H0 -10.5 2.5 13.0
EURO$ H0/H1 -12.5 -10.5 2.0
EUR 114.69 113.64 -1.05
CRUDE (1st cont) 51.90 54.04 2.14
SPX 2596.26 2670.71 74.45
VIX 18.19 17.80 -0.39
https://www.investmentwatchblog.com/capitol-hill-braces-for-shutdown-to-end-in-disaster-trump-major-announcement-saturday/
https://www.bloomberg.com/news/articles/2019-01-20/shifting-treasuries-buyer-base-may-be-bond-market-achilles-heel?srnd=premium
https://www.federalreserve.gov/releases/z1/20181206/html/d3.htm
https://www.federalreserve.gov/releases/housedebt/default.htm
Posted on January 20, 2019 at 1:42 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Jan 18, 2019. Finding middle ground

–This morning EDH9/EDH0 calendar spread is very nearly back to positive, having been as low as -27 at the start of January.  Both contracts are now around 9731. In the past couple of months this spread has gone from PLUS to MINUS 1/4% and is now gravitating to the center.  The market is back to a tenuous embrace of somewhat looser financial conditions and central banks that are no longer tugging on the rug of withdrawing liquidity.  Stocks revealed the underlying sentiment, quick to rally on talk that Chinese tariffs might be lifted.  Quarles yesterday laid out a base case of a solid domestic economy, but again alluded to overseas risks.  Interest rate futures are settling into a ‘not too hot, not too cold’ comfort zone, with low volatility.  However, continued enthusiasm in stocks could bring back fears of hikes.

–Large buying in front end Short Sterling call butterflies yesterday, June’19, Sept’19 and Dec’19 9900/9912/9925 c flies:  +60k June for 3.5, and at least 10k each Sept 2.75 and Dec 2.0.  Futures settlements were 9901, 9896, 9889.  Looking for the slow grind roll-up

Posted on January 18, 2019 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

The rebound of 2019 – stalled

-Late news that Federal prosecutors are opening a criminal probe into Huawei snuffed a stock market rally.   It also appears that rebounds in copper and oil have stalled, as the market weighs central bank nods to increased liquidity vs a global slowdown that shows no signs of abating.  An article on ZH citing Morgan Stanley notes that the Baltic Dry Freight Index (and other shipping prices) have had a recent pullback, but prices of industrial commodities are probably a better signal.

–Rates rose a couple of bps across the curve yesterday with tens +2 to 272.7.  Feb treasury options expire one week from tomorrow, with the atm straddle trading 32/64’s, worth about 6.7 bps.  Former Fed President Lockhart said a March pause doesn’t necessarily mean that hiking is over (not that his comments mean much) but it’s somewhat interesting that the Fed Fund calendar spreads which bracket the quarterly meetings indicate no hike in March or Sept, but give perhaps a 10% chance of a move in June.  Feb/April spread is 0, May/July is 3.0 and Aug/October is 0.  It’s also somewhat surprising that EDH9/EDM9 is the only positive 3-month spread at +2.5, aside from EDU9/EDZ9 at +0.5… all others are inverted.

–Volume has been quite light in rates.  I would guess activity will pick up if stocks resume a downtrend.  Vol sellers have taken advantage of the lull to paste all bids, but geopolitical uncertainties loom large.

Posted on January 17, 2019 at 5:13 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Jan 16, 2019. A Simple Lapse

–If you told me early Tuesday morning prior to the open that there would be over 200k atm treasury call spreads sold and that stocks would push to new highs for January, I would not have guessed that five, ten and bond futures would close unchanged on the day.  But that, of course, is exactly what happened.  In FVG, the 114/115cs was sold 50k and the 114.5/115.5cs sold 60k, the former appearing new and the latter a liquidation from late December; FVH9 closed 114-170, up 0.5.  In TYG, the 121.5/123.5cs sold at 31, 25k, 122/123cs sold at 15, 60k, and 122/123.5cs sold at 19, 25k.  TYH settled 121-29, unch’d.  Feb options expire one week from Friday.  Implied vol in treasuries is at new recent lows.

–This morning treasury futures ARE weaker, with the bond down half a point at 144-30, a new low for this early year.  As the chart below shows, 5/30 treasury spread has been grinding higher for the past six months, ending yesterday at 54.5 bps.  According to my marks, the high last year was 62.3 on 9-February, just under one year ago.  As Fed officials underscore the idea that rate hikes have been suspended (Esther George yesterday), support for the long end diminishes.  A large liquidity injection by the PBOC might also be considered as a nudge to the steepener, if only at the [wide] margin.  It feels like global central banks, in their “risk management” capacity, all of a sudden would rather err on the side of ample liquidity. 

–Beige book today in advance of the Jan 29/30 FOMC.  The next meeting is March 20, just after the IMM date.  Theresa May faces a no confidence vote.  Retail sales…anyone’s guess.  At the top of the Census Bureau website it says NOTICE: Due to a lapse in federal funding, this website is not being updated.  Do nagging concerns about credit worthiness start to creep in?  Nah.

Posted on January 16, 2019 at 5:10 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Gov’t shutdown closes euro$ futures

–Quiet Monday featured slightly higher yields.  Greens (3rd year) were the weakest part of the euro$ curve, settling -2, while the ten year rose 1 bp to 270.6.  5/30 remains firm at 53.4 bps, up 2.3 on the day, poised to make new highs.  While yields edged higher, option activity mostly favored the upside with buying of TYH 122.5 calls and 122.5/124 call spread vs 120.5p.  Overall activity was light.  It’s as if the gov’t shutdown has spilled into the interest rate market.   

–One trade of note in euro$’s was a buyer of 0EG 9725/9712 put spread vs the same in 2EG.  The Feb midcurve on EDH0 settled 2.50 and 0.75 so 1.75 and the 2EG settled 1.25 and 0.50 or 0.75.  So the spread to spread settled 1.0, where it traded.  Futures settles were 9739 in EDH0 and 9750.5 in EDH1 so the futures spread settled -11.5.  As long as the futures spread remains inverted, any sell-off could cause the near put spread to go in the money, while the back remains out.  Similar idea without the spread risk is 0EG 9725./9712 put 1×2 which was offered at 1.0 late.  This type of trade has become more popular, buying nearer puts and selling deferred, with the idea that calendar spreads remain inverted even if yield go up. 

–Long green euro$ 9750 straddle strip settled at 371.25 on Friday on a flurry of large late buys of 9750 calls in EDH1 and EDM1.  Yesterday all straddles came right back down to Thursday’s levels and the strip traded 362, settling at 363.  

–May is apparently on the verge of a humiliating Brexit vote, but GBP is down only slightly and only barely changed vs euro as Germany’s growth at 1.8% in 2018 is the weakest in five years. 

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