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

Oct 30. Liquidity Withdrawal (Boo)

–An afternoon headline that said the administration was considering more tariffs on China if Trump-Xi talks fail sent stocks tumbling to new lows yesterday.  it’s easy to conclude that a deal at the G20 at the end of November will therefore cause stocks to stabilize and rally, but even it that were to be the case, there are likely to be bumps in between.  For example, the Fed’s balance sheet adjustment accelerates this month with the roll off of over $22 billion maturing issues.  Table below is from website showing Fed’s holdings, 4th column shows maturing amts:  Note that the Fed’s schedule is now at a rate of $50b/month.
10/31/18 912828T83 0.750 1,571,797.0 5.70%
10/31/18 912828WD8 1.250 3,542,000.0 10.12%
10/31/18 912828RP7 1.750 17,812,617.0 59.17%
A MacroTourist article from mid-May tagged QT days as negative for stocks; perhaps no surprise as liquidity is siphoned out of the market.
–In any case, the decline in stocks didn’t spark much of a flight to quality bid in treasuries.  The ten year rose 1 bp too 3.083% while the euro$ curve was down 2 to 3.5 from the reds back.  DJIA has fallen 10% from the high set in the beginning of the month, and the magnitude of the move is similar to the plunge in early February, though that event was more tightly compressed in terms of time.
–Vol moving forward on the ED curve.  A couple of months ago, blue midcurve straddles were nominally more expensive than greens.   Yesterday there was a seller of 3EU 9687 straddle to buy 0EU 9687, selling blue for 1.5 over.  The Green straddle (2EU 9687^) settled 57.5, 2.5 over the red and 2 bps above the blue.  Not sure exactly how to interpret the change, perhaps the end of the Merkel and Draghi era has something to do with it.
Posted on October 30, 2018 at 5:27 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Tastes Like Malort – Weekly

In a week that was trying on many levels, I couldn’t help but laugh when Dave Lutz of Jones Trading succinctly started his always informative missive with: “Tastes Like Malort”.  And so, with Lutzie’s gracious permission, I decided to run with the theme, although it’s almost funnier to just leave the phrase alone.

This will be hard for some to believe, but I had never had Malort before.  In my formative college years I had worked as a clerk in a liquor store in Chicago and never recalled seeing it.  In fact, my older and wiser brother, no stranger to spirits, had told me about doing shots of this horrible drink called Malort, and I actually had always thought it was “Mi Lord”, lending it a certain air of medieval respectability.  I was wrong.  Oh. It’s medieval alright, like a spiked mace.  Malort is a hometown favorite, having been produced in Chicago since the 1930’s by a Swedish immigrant Carl Jeppson.  Again, borrowing stealing from Lutz, and putting social media in its place, is a Malort tagline:

From the original label:

Most first-time drinkers of Jeppson Malort reject our liquor. Its strong, sharp taste is not for everyone. Our liquor is rugged and unrelenting (even brutal) to the palate. During almost 60 years of American distribution, we found only 1 out of 49 men will drink Jeppson Malort. During the lifetime of our founder, Carl Jeppson was apt to say, ‘My Malort is produced for that unique group of drinkers who disdain light flavor or neutral spirits.’ It is not possible to forget our two-fisted liquor. The taste just lingers and lasts – seemingly forever. The first shot is hard to swallow! Persevere.  Make it past two ‘shock-glasses’ and with the third you could be ours… forever.

I didn’t know any of this when, on a drizzly late winter afternoon, I took the el up to Addison Street, (where the platform stands in the shadows of Wrigley Field) having been invited to a friendly poker game in that area.  It was right around 5 o’clock and the event was set for 7 with warm-up cocktails at 6.  I decided to kill some time and took shelter by ducking into Joe’s on Broadway, a storefront neighborhood tavern.  I had never been in that particular establishment, but it had a jovial group of Friday afternoon regulars and I thought it best to quietly take an open stool and try to fit in by putting down a 20 and ordering the $3 draft special which was either Pabst or Old Style, and the bartender, a woman of indeterminate age welcomed me by making sure I had a Pabst cardboard coaster to go under my pint.  It wasn’t long before I noticed at the end of the bar, a slight-of-build girl, pretty but tom-boyish, in jeans and a sweater, with dark hair nearly shaved on one side regularly interspersing her sips of beer with shots of Malort with the bartender.  After making her acquaintance it was only right to buy a round of Malort, and may I add, it’s everything that it’s advertised to be.  It’s here that my years of market experience came in handy, because they wouldn’t have missed my presence (only my buy-in fee) at the tournament.  I immediately realized that if I stayed, this waif of a girl would easily outdrink me, let alone the bartender, who might have had Malort running through her very veins, and they were already at least 3 shots into it.  When you have a suspicion that you’re outgunned, and that your capital relative to other participants may fall short, it’s probably best to step away.  Don’t let your winners turn into losses, as we like to say.  I left.

The stock market provided rugged, unrelenting, and even brutal losses this week.  Stock investors were unceremoniously unfriended.  Treasuries were the beneficiary, with fives leading the way, down over 15 bps in yield to just over 2.90%.  Tens fell 12.4 bps to 3.074%.  After a rollicking start to the year on the back of the tax program and repatriation, most major averages are now lower on the year, DJIA -0.1%, SPX -0.6%, Russell 2k -3.4%, but Nasdaq is still +7.1%.  Banks and builders have taken heat, with financials down about 10% on the year and the SP Homebuilders ETF (XHB) down 25%.  What is somewhat interesting is that the eurodollar curve, from reds back, slipped into inversion pretty much right after the June FOMC hike.  From July forward, reds/greens (2nd to 3rd year forward) and reds/blues (2nd to 4th) have been hovering just below zero.  One might say that the euro$ curve has unrelentingly signaled a growth slowdown since summer.  In fact, if we just concentrate on XHB homebuilders, it would appear as if Trump is right, it’s the Fed that has been too tight.  After the June hike, XHB held up, but after the Sept hike it’s been a straight down slide of nearly 20%, from just over 40 to Friday’s close of 32.59.  As I’ve mentioned repeatedly, the withdrawal of central bank liquidity is the main driver, in the form of higher short-end funding costs and scheduled balance sheet reduction of $50 billion per month since the start of October.  Friend RM notes that rate hike expectations are generally shattered when SPX trades 10% under the 200 DMA.  Makes sense as an indicator to keep an eye on; certainly the 200 DMA has provided support and SPX is now about 4% below that level. The shape of the euro$ curve would suggest 10% below the 200 DMA sometime next year.  Currently, the nearest one-year calendar spread that is inverted is EDZ19/EDZ20 at -2.

The upcoming week brings the employment report on Friday.  Almost all aspects of the labor report have been strong, and wages have become the primary factor.  Though jobs data is a lagging indicator, the Fed’s concern about inflation (wages) make it unlikely that the mantra of gradual increases is altered.  The Fed will enter a blackout period this week prior to the November 8 FOMC.  The other cloud over financial assets has been deepening trade war rifts.  On Tuesday the White House confirmed a meeting between Trump and Xi at the G20 later in November.  Perhaps this announcement was partially repsonsible for Tuesday’s surge off the lows, but by Wednesday SPX had buried whatever hopes had been kindled.  In any case, Scott Minerd of Guggenheim suggested on a CNBC interview that Trump would likely soften trade threats significantly at that meeting in an attempt to save the stock market.  However, this weekend the South China Morning Post reports that the WH is considering removing trade from the agenda. (trial balloon?) While China’s yuan remains close to the psychological level of 7, and unlikely to break that level before the meeting, a rancorous outcome would likely see further immediate yuan depreciation with global ramifications.  G20 Nov 30 – Dec 1.

Financial conditions in general remain key, and these operate with lags on various sectors of the economy, occasionally morphing from nagging concern to sheer panic in a rapid acceleration.  The lag in housing is shown below.

Nowhere does the sense of panic grip more tightly than fear of a loss of funding.  As has been noted the past couple of weeks, the rollover of corporate debt is going to be at higher rates, and might be less congenial than in the recent past.   On a more immediate note, the Fed Effective rate is now printing 2.20%, exactly at the Fed’s IEOR rate.

An article on Bloomberg from mid-September cited CS’s Zoltan Poszar flagging the problem of the Fed Effective hugging the upper band; the article noted several options to rectify it.  For example, cutting the rate on IEOR, which many now expect in November.  Or here was another idea from the article: “…a reverse twist where the Fed sells longer dated treasuries from its portfolio and buys t-bills on the open market.”  There are certainly plenty of t-bills for sale. (And it would be nice to see a 4 handle on long bonds).

I would note that 5/30 treasury spread this week closed at a new recent high of 41 bps.  During the 2004 to 2006 tightening cycle, the 5/30 spread had bottomed in February, four months before the last hike.  It dipped at the last hike in June and then traded sideways for a long period of time before moving higher.  In the current cycle, the spread bottomed in July, after the June hike, and dipped again around the Sept FOMC hike, but now appears poised for better levels.  Toss a reverse twist into the mix of already heavy treasury supply and watch the long end crater.

If the Federal Home Loan Banks are not lending into the FF market due to, for example, competition from t-bills with ever-increasing supply, then rates at the short end might burst higher.  Weakness in global financials could easily figure into higher eurodollar rates.  We’ve gotten into an environment where various players wait for others to blink.  If the Fed blinks, (by suspending rate hikes) the curve would likely steepen In a ‘risk-on’ party.  If Trump blinks with China, it might spark risk on, but add to the Fed’s resolve of tamping down on financial imbalances.  If Italy blinks on its budget, the euro will likely rally.  If everyone tenuously holds onto their positions, then its going to become a massive de-risk, exacerbating what Volcker referred to as “a hell of a mess in every direction.”   And THAT’S when we reach for the Malort.  With both fists.


10/19/2018 10/26/2018 chg
UST 2Y 293.0 280.6 -12.4
UST 5Y 305.7 290.4 -15.3
UST 10Y 319.8 307.4 -12.4
UST 30Y 338.2 331.3 -6.9
GERM 2Y -58.0 -63.0 -5.0
GERM 10Y 46.0 35.2 -10.8
JPN 30Y 90.9 85.7 -5.2
EURO$ Z8/Z9 50.5 40.0 -10.5
EURO$ Z9/Z0 2.5 -2.0 -4.5
EUR 115.14 114.04 -1.10
CRUDE (1st cont) 69.28 67.59 -1.69
SPX 2767.78 2658.69 -109.09
VIX 19.89 24.16 4.27


Posted on October 28, 2018 at 11:44 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Oct 26. Stocks at new lows as Nov treasury options expire

–AMZN and GOOGL earnings reports disappointed yesterday afternoon. with the former falling 8% after the report and Bezos rescinding the recently announced $15/hour wage.  Just kidding about the last part, but this is where we see whether the ‘wealth effect’ begins to run in reverse.  Stocks are at new lows for the move, though well above the VIX inspired blow-up in February.  Fed officials, like Mester yesterday, are inclined to separate the health of the economy from the ups and downs of equities, but an 8% drop in AMZN is still a quick $65 billion which has vanished.  In any case, today brings Q3 GDP, expected to post an initial gain of 3.3%.

–Rates were little changed yesterday with the ED strip down one from front June, EDM19, through the blues.  Implied vol tumbled, with early (new) sales of TYZ 117.5p setting the pace.  Open interest in this strike rose by 59k; settled 10 vs 118-17, and took the Dec 118.5 straddle from 1’05 to a settlement of 1’00.  New lows in stocks this morning corresponds to new highs in treasuries, with the expiring November 119 calls in tens threatening the strike.  these calls settled at 1 yesterday with open interest of 134k; they had been bought heavily early in the week from 2 to 4.  Auctions ended yesterday with the seven year, it’s end of the month, these calls could easily finish in the money.

Posted on October 26, 2018 at 5:07 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Oct 25. Bring in the bomb squad

–Pipe bombs sent to the political elite and CNN were intercepted yesterday, but they done blowed up the market real good.  SPX -3.1% while Nasdaq fell 4.4%.  Forward expectations of rate hikes seeped out of the market with new lows in all near ED calendar spreads.  For example, EDM19/EDM20 settled at just 15.5, -4.5 on the day.   Nov/Jan FF spread closed at 17.5, down 1 on the day, and Feb/April, which captures the March FOMC, settled 15.5, down 1.5.  The front end is increasingly indicating funding pressures, with the Fed Effective yesterday at 2.20%, exactly equal to IOER, and 3m libor was over 2.5% for the first time.  Financial etf XLF held up better than other sectors but was still down by 2.5%.  New Home Sales weaker than expected as higher mortgage rates start to bite.
–Global concerns aren’t easing.  CNY this morning traded above 6.95, a new low for the yuan, and while Di Maio expressed support for the euro, Italy is not backing off on its budget.  Stocks have bounced, but remain vulnerable.  Perhaps AMZN and GOOGL earnings today can turn the tide.
–A few flight to quality trades in treasuries:  TYZ 119/120.5 call spread bought at 17 in 15k (settled 19 ref 118-20).  TYZ 123.5c 1 paid 20k and USZ 148c 2 paid for 15k.
–On the eurodollar curve, greens were the star performers, settling up 6 on the day, while reds in front were +4.625 and blues behind were +5.5.  Green/blue pack spread is still inverted at -1.25 bps, which makes little sense if the Fed is forced to blink.  News today includes Trade, Durables and the US 7-year auction.
Posted on October 25, 2018 at 5:27 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Oct 24. Nothing is over until we decide it is

–A spirited rally off yesterday’s lows in stocks had some feeling as if the danger had passed, but this morning ESZ is again lower, and large earnings reports are yet to be released (MSFT and AMD after the bell today,  AMZN and GOOGL tomorrow).  Rate futures well supported by yesterday’s weakness in stocks, though final settles were well off the highs.  Large (new position) trades included +150k TYZ 120/121 call spread for 5 (3s, OI +111k and 80k) and +80k 0EZ8 9700/9737 call spread for 2.5-2.75 (2.0s OI +67 and 48k).  There was early buying of TYX8 119c for 1-4, settled 2 vs 118-08+ with settlement this Friday.
–Weak europe PMI has the euro testing new lows this morning at 1.1413.  Crude oil crushed yesterday with CLZ down over $3/bbl late to 66.30 and no recovery this morning.  Trump stepping up attacks on A) migrant caravans B ) China C) Powell D) All of the above.  Trick question, the answer is always D.  Reminds me of when I went to take my membership test at the CME many years ago.  A tense classroom as the tests were handed out.   Multiple choice.  Within about 3 minutes, one potential member says, I don’t exactly understand question number 3.  The instructor whose name escapes me at this minute just says, “B, the answer is B.”  Next classmate, “And what does question 5 mean by bidding outside of the market?”  “The answer to 5 is C”.  And so that test went….memberships for everyone!  Well here’s another easy test question.  “Want to see the curve steepen wildly?”  Answer, “Fire Powell.”
–Late start today as I fully expected to take the day off due to winning the Mega Million lottery.  Back to trading pork bellies.
–Kindly featured in latest blog.
Posted on October 24, 2018 at 5:31 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options