Double down

May 31, 2019

–When criticized over an unpopular stance, Trump generally doubles down.  Last night he announced tariffs on Mexico to stop illegal immigration.  Stocks have reacted poorly, making new lows overnight.  It’s end of month today, but portfolio rebalancing has likely already occurred.  Yesterday, VP Pence warned that the US could double Chinese tariffs and in another provocative move, is set to give a speech next week on June 4th to commemorate Tiananmen Square.  Nothing particularly stock friendly in these developments.  On the positive side, UBER only lost a billion last quarter.  

–Treasury futures are making new highs.  The peak contract on the eurodollar curve is still EDH21, which settled 9819.5 yesterday and this morning is up 10 to 9829.5, around 80 bps lower in yield than the front EDM9 contract.  The market is clamoring for an ease with EDU9 up 6.5 to 9770.5, causing EDM9/U9 to print -20.

–Reuters reported yesterday, “US based investment grade bond funds, which move in sympathy with equities, posted more than $5b of outflows in the week ended Wednesday, the largest weekly outflow since Dec 2015, according to Lipper.”  Issues regarding liquidity and redemptions may resurface.  

–Byron Wein was on CNBC yesterday and was asked whether the Fed was too tight.  He mentioned that usually, the yield curve flattens when the Fed is raising rates, but currently it is because long rates are coming down.  He didn’t seem very comfortable with that situation, which is sort of an indication that a lot of people are wrongly positioned.  In any case, all tenors are coming down this morning. 

–Today’s news includes Personal Income and Spending, with the Fed’s preferred inflation measure, yoy Core PCE deflator.  Last at 1.6% (actually just under but rounded up).  As mentioned earlier in the week, the declines in Mfg and Service PMI data skew the risk to the downside for PCE prices, though it’s expected unch’d at 1.6. 

Posted on May 31, 2019 at 5:07 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Two views on corporate debt

May 30, 2019

–While yields fell and near eurodollar calendar spreads continued to make new lows, buying pressure subsided near the end of the day and contracts closed well off early morning highs.  Tens ended the day (3:00pm mark) at 2.234%, down 2.8 bps.  EDM9/EDM0 settled -59 bps, -3.75, and EDZ9/EDZ0 settled -40.5, down 1.  As the reds continue to lead, some of the more deferred spreads are making new recent highs.  For example, red/blue pack spread edged to a new high of 12.625, up 1.25 on the day.  German bund made a new all time low of -17.9 bps.–Some late profit taking came after a relatively weak 7 year auction which featured low bid-to-cover of only 2.3.  Not too surprising given that foreign central banks, which are less sensitive to price, are less of a factor, and private buyers may have sticker shock given the recent decline in yields.

–New buyer of 100k EDQ 9787.5/9800 call spread for 1.25.  Settled there ref EDU9 9764.0s.  Apart from the trade war, the budget ceiling battle may also be in full swing by August, and with it a lack of t-bill supply.  Of course, Fed ease odds continue to rise.  FFF0 posted a new high settlement price of 9799, +3 on the day and just shy of 2%.

–There were two interesting notes yesterday concerning the corporate bond market, which featured rather different conclusions.  First, the NY Fed’s Liberty economics blog showed that while corp debt is a record of GDP, earnings are at record highs as well.  When taking earnings into account, debt burdens don’t appear onerous.  Second, this note showed that debt was mostly being funneled into acquisitions and buybacks rather than capex.  It’s well worth checking the link, if just for the charts. the opposite side was a BBG interview with Pimco which featured Scott Mather.  “We have probably the riskiest credit market that we have ever had in terms of size, duration, and quality aspects.”  He essentially said that central banks have run out of ammo in terms of supporting asset prices; the US was the only central bank to ‘normalize’ and that high quality treasuries are the only place to hedge risky assets.  This interview followed the Pimco outlook piece: Dealing with Disruption. it was also nicely summarized in a ZeroHedge piece

The point is, high levels of debt are currently being serviced, but if rates rise, or if a slowdown further endangers earnings, that may change in a hurry.  Like everything else, it’s all in the timing.  By the way, 30 year bond yields fell to important support levels of 2017.  If there was ever a place to take a shot at selling the long end (Ultra bonds) this is probably it.

30 year bond yield
Posted on May 30, 2019 at 5:09 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Get ready

May 29, 1973

–Rare Earth was a band from the 70’s, the first all-white band that was signed to the Motown label.  They did a bunch of Temptations covers, the most famous of which was ‘Get Ready’ from 1969, but I’ve included a youtube link below from 1973.  

–I don’t know how many times I read that the US holds all the cards in the US/China trade squabble, but what comes to mind right now is the famous Mike Tyson quote:”Everybody has a plan until they get punched in the mouth.”  Get ready, China is threatening to suspend sales of rare earth elements to the US and all of a sudden, US stocks are looking quite vulnerable.  Of course, maybe YOUR plan was to buy bonds.  In that case, happy days as all interest rate contracts are making new highs.  Should the threat of rare earths cause an increase in Fed easing probabilities?  This is when we start hearing about complex modeling techniques with “transmission effects”.  In other words, if stocks go down, the Fed reacts (as it did in January).  As an aside, it’s not particularly rare, but copper is also making new lows this morning.   One other aside, 1973 had another parallel, the OPEC oil embargo, starting in October.

–In yesterday’s trade, all near eurodollar calendar spreads fell to new lows.  The lowest one-year is June/June EDM19/EDM20 which settled -55.25, down 5 on the day.  (It’s currently -59.5). EDU9/U0 fell 5 as well to -49.5 and EDZ9/Z0 down 3 to -39.5.  The move to price Fed eases is unstoppable for now.  The attached chart shows it’s not just the US, but Short Sterling and Euribor, as those near one-year spreads are also declining (though still positive).  

–The other active trade theme was buying of treasury wings.  As examples, +60k FVQ 134.5c for 2/64’s and +75k FVQ 111.75p for 1.  The TYQ calls are 90 to 100 bps out of the money, which might hint at a return to the low yields of 2016.

–May FF contracts expire on Friday to the average of the Fed effective rate over the contract month and settled 9761.25.  The October contract is 9777, or 15.75 higher in price, indicating odds of an ease by the Sept meeting over 60%.  

–Today’s new includes the 7 year auction.   

Posted on May 29, 2019 at 5:01 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Long treasury yield continue to sink

May 28, 2019

–Yields backed up a little on Friday following Thursday’s moves to new lows.  The ten year ended the week at 2.32%, up 2.6 from Thursday.  However, this morning TY and US futures are making new highs as are ultra-tens and bonds.  Wait a second, did the Chinese threaten to BUY US debt?  EDH21, the peak of the eurodollar strip, is also at a new high this morning, printing 9813 (+4.5).  The tilt of EU parliamentary elections toward euro-skeptic parties may be a factor. 

–Corn is also at new highs today, as wet weather patterns continue. July Corn up 10 cents to 4.14 1/4

–Today brings auctions of 2 and 5 year notes.   
–2/10 on Friday slipped to a new recent low of 15.4 bps.  Curve likely remains pressured with auctions.

–Attached is a variation of a chart I posted this past weekend.  This one is just PMI Manufacturing vs Core yoy PCE.  Clearly there’s a relationship between the two, and makes Friday’s PCE data look like it could drift further away from the Fed’s target.–Nominal levels of blue midcurve straddles are quite a bit lower than reds.  As an example, 0EU 9800 straddle settled 34.5 ref 9804.5 on Friday, while 3EU 9800^ settled 29.5 vs 9794.5.  Because the market perceives the Fed to be “in play” the reds are juiced.  However, it’s worth noting that the Fed doesn’t hedge mortgage securities, while private buyers do.  At the May 1 FOMC meeting, there was no addendum on Balance Sheet principles.  It’s worth noting that the Fed, (as outlined in the March 20 FOMC summary), intends to let MBS roll off and be reinvested in treasuries up to $20 billion per month starting in October 2019.  October of 2018, when the Fed ratcheted up the roll-off to $50 billion a month, is when things went pear-shaped for stocks.  I’m not sure of market implications going forward, but just think that the deferred part of the eurodollar curve may become more volatile as the year progresses.

Posted on May 28, 2019 at 5:13 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Sugar crash

May 26, 2019 – Weekly comment

In March of 2018, the Wall St Journal published an op-ed by Kevin Brady and Lawrence Lindsey, ‘Tax Reform is No ‘Sugar High’’.  There were all sorts of analysts claiming otherwise, that such stimulus, coming at a time when unemployment was near record lows, would shortly fizzle. Indeed, there were many arguments both ways, but in hindsight, it appears as if the economy peaked in summer of last year.  Whether that was due to the fading effects of legislation, (from BAML, “In the US, the double dose of caffeine from tax cuts and spending increases is already starting to wear off”), or due to companies building inventory to avoid trade tariffs, or due to the lagged influence of tighter monetary policy, it’s hard to argue with charts like the one below.  Both Manufacturing (blue line) and Service (white line) PMIs peaked in summer of 2018, as did Core PCE prices (lower panel green).  The latest readings from last week are flirting with 50 (50.6 and 50.9) and were quite a bit weaker than expectations.  The last time Markit PMIs were this low was in mid-2016 when yields were at their lows.  This Friday we’ll get Core PCE yoy prices which were just under 1.6% at last reading.  From the chart below I’d forecast slightly softer Core PCE. Perhaps the larger issue is whether or not price weakness is transitory, but a plunge of $4 in the price of crude oil last week doesn’t augur well for a quick rebound.  Dr Copper which has dropped 10% in the past month isn’t giving a vote of confidence either.  The latest NY Fed GDP Nowcast was 1.4% for Q2, down from 1.8% on May 17 and 2.2% the week prior.  The Atlanta Fed was at 1.6 in mid-May and is now 1.3%.  JPM slashed Q2’s estimate from 2.25 to 1.0%.   AP Moller-Maersk, “the world’s larget shipping company said estimated global container trade grew 1.7% in Q1, down from 3.6% in 2018.” (Biz Insider). 

Markit PMIs and Core PCE prices

Quoting Lacy Hunt, or rather re-quoting Lacy Hunt from the latest Mauldin missive, “Federal debt accelerations ultimately lead to lower, not higher, interest rates.  Debt funded traditional fiscal stimulus is extremely fleeting when debt levels are already inordinately high.  Thus additional and large deficits provide only transitory gains in economic activity, which are quickly followed by weaker business conditions.  With slower economic growth and inflation, long-term rates inevitably fall.”

The economy seems to be adhering to that script.  And given that in mid-2018 we might have had an overshoot of growth due to stimulus and inventory build, is it crazy to think we could get an undershoot in the other direction?  I think not. 

Trends change.  In the picture at top, nearly every man is wearing a hat.  I think I first saw this topic in the book Freakonomics. But a more recent article in Esquire notes, “…people who dared to walk bare-headed in hat-making towns were abused by workers who saw their livelihoods being threatened.”  In the picture underneath, every woman is looking at her cell phone. Well, now everyone is buying eurodollar calls.  Sometimes, as in the case of hat wearers, the trend just runs out of steam.  And some trends appear unstoppable.  In the case of eurodollar calls, the shorts are being abused. 

Regarding euro$ call buying, I would note the new-found popularity of the 9800 or 2% strike as a long.  Week over week on EDZ9, the 9800c went from 454k to 508k open positions, an increase of over 50k.  Trades placed were mainly long 9800/9837 call spreads and 9800/9837/9862 call butterflies.  The 9837 strike is 100 bps lower in yield than the recent target which had been 9737.5, a libor mark of 2.625%.  It’s worth noting that the midcurve December 0EZ 9800c also saw a weekly open interest jump of nearly 40k contracts.  EDZ9 settled at 9769 and EDZ0 settled 9805.5, for a close in the one-year spread of -36.5. A new low for that particular spread was posted this week on Thursday at -37, also when EDM9/EDM0 settled at a new low for any one-year calendar in this cycle of -52.75. 

According to the Bloomberg WIRP page (World Interest Rate Probability) the expectation for a rate cut by the Jan 2019 FOMC is 85%.  According to January 2019 Fed funds, the probability of an ease by the end of the year (Dec 11 meeting) is a lock.  FFF0 settled 9793.0 or 2.07%, more than 30 bps below the current Fed Effective rate.  EDM9/EDZ9 settled -21.25. so taking that value over 25 yields 85%. In any case, option traders are saying “buy ‘em”.  The Fed is being discounted. 

In a week when US yields were under significant pressure, the dollar index held fairly strong. The trend has been higher for the past year, and YTD highs were tested Thursday.  Friday saw a pullback in USD, but of course many countries want the trade benefits bestowed by weaker currencies.  That probably includes China.  Rather than support their currency by selling US treasuries, which is what many financial commentators are wringing their hands over, the larger concern would be if US equity markets keep going lower.  The US population will have a hard time accepting that outcome.  Another risk is that if China were to curtail the export of rare earth minerals, the tech industry would suffer. All those cell phones in the picture above use rare earth elements. The Semi-conductor SOX index is already off 18% from the 2019 high marked just one month ago.   The rare earth etf, REMX, had a surge in volume if not in price.  An increase in treasury yields is not the worry, it is rather a decline in stock prices. Threats to the technology industries accentuate that risk. 

The G20 meeting is in Osaka on June 28-29.  China is downplaying the possibility of a meeting between Xi and Trump.  The June FOMC is a bit over one week prior on June 19.  It’s highly unlikely that the Fed would make a move that could be construed as political just in front of negotiations on the number one risk facing global markets.       

Now for notes on weekly changes in some yield levels.  The 2 year treasury fell 3.4 bps to 2.166%, tens and bonds fell 7.3 bps to 2.320 and 2.751.  EDZ9 rose 4 bps on the week, but the red euro$ pack surged just over 9 bps in price (lower in yield) and the green euro$ pack rose 7.375 bps.  Just a few comments about these levels. In November of last year the two-year note almost hit 3%, so it has fallen more than 80 bps since then.  At the September 2018 FOMC the Fed raised the target funds rate to 2.00 to 2.25%.  The two-year yield is now right in that wheelhouse. The December 2018 rate hike has been reversed, and the market is calling, like Kudlow, for another 50.  The ten year yield at 2.32% is right around the 50% retracement level from the low in 2016 to the high in November of last year.  There should be strong support from 2.07 to 2.17 which would mean resistance in TYU around 126-16. 

In terms of the strength in the eurodollar strip, it’s worth noting that all swap spreads are making new lows.  The two-year is holding just above the water line at 3.6 bps, the five year just under the surface at -0.5 and the ten year is -5.0.  Except for the ten year, the last time we were at these levels was in 2016, and nothing particularly good was happening at that time. A couple of analysts have noted firming of corporate spreads over the past several weeks.  However these moves have been relatively modest.  Since April the BBB spread has gone from 148 to 163 and the BAML High Yield from a low of 364 to 422.  Of course, due to compressing swap spreads its fair to say that corporate spreads in general (using swaps as the benchmark) are widening a bit more. 

On Tuesday, 2 and 5 year notes are auctioned, followed by 7’s on Wednesday.  Q1 GDP revision on Thursday and Personal Income and Spending, with PCE prices, on Friday to close out the month.    


Last week I had suggested that TYM would test 125-00 as that was the call strike with the most open interest.  Indeed, TYM traded over that price and the strike pretty much acted like a magnet at the end of the week.

Nearer in time on the curve, consider this: EDZ9 settled 9769.0.  EDZ9 9775/9800 call 1×2 settled -0.25 (12.75 and 6.5), while the equally out of the money 9762/9737p 1×2 settled +7.0 (11.5 and 2.25).  These prices highlight the skew (and fear) in the market.  There is little to no concern about the possibility of rate hikes.

5/17/2019 5/24/2019 chg
UST 2Y 220.0 216.6 -3.4
UST 5Y 217.8 211.9 -5.9
UST 10Y 239.3 232.0 -7.3
UST 30Y 282.4 275.1 -7.3
GERM 2Y -64.6 -63.1 1.5
GERM 10Y -10.4 -11.7 -1.3
JPN 30Y 52.4 49.8 -2.6
EURO$ Z9/Z0 -31.0 -36.5 -5.5
EURO$ Z0/Z1 1.0 3.5 2.5
EUR 111.59 112.08 0.49
CRUDE (1st cont) 62.92 58.63 -4.29
SPX 2859.53 2826.06 -33.47
VIX 15.96 15.85 -0.11

Posted on May 26, 2019 at 7:31 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options


May 23, 2019

–Weakness this morning in equity futures, especially the small cap Russell (RTYM9) which is testing last week’s low, currently at 1520.  Oil is also testing last week’s lows with CLN below $61/bbl.   The realization of no quick resolutions to the trade impasse has settled over the markets.  Treasuries are bid; with June option expiration coming Friday, it appears as if the 125 strike could come into play, TYM9 currently 124-205.  Apart from trade issues, the debt ceiling is starting to get some attention, with Mnuchin warning of a late-summer default if the limit isn’t raised.  And, with european elections coming up, EUR is pressing new lows.  One of the analogies that I find is overused is “the perfect storm” but what the hell, this could be it.  Yuan weaker, Turkish lira weaker.  

–Summaries of the Fed minutes concluded there would be no rate cuts for ‘some time’.  May 1 to July 31 is 13 weeks, or 91 days.  Those are FOMC dates, with another one in the middle on June 19.   That qualifies for some time.  Will a meeting between Trump and Xi in late June keep the Fed on the sidelines in June?  Probably.  The July/Aug Fed Fund spread settled  -1.75 yesterday.  Anything above -2 is probably a sale [THIS IS NOT RESEARCH OR A RECOMMENDATION].  At the end of December Tesla was 375.  Yesterday it ended at nearly half that level, closing at 192.  Sentiments change.  I think I saw a BBG headline saying that an extended trade war is now becoming a base case for many forecasters.  I think base case is pretty much the opposite of transient.  

–By the way, the ten year treasury to inflation-indexed note spread is at a new recent low of 180 bps, not having been this low since late January.  It started the year around 170, firmed to nearly 2% as stocks recovered, but is now fading again.  This Fed has fixated on inflation expectations, whose decline is just another headwind.  In the storm.  That’s coming.  I’ll stop now.

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

FOMC minutes. It all hinges on “transitory”

May 27, 2019

–FOMC minutes from May 1 this afternoon.  Bullard spoke earlier, saying the Fed could still cut if inflation data falls short, even if growth numbers are firm.  The May press conference was where Powell deemed several of the factors holding down inflation to be “transient” so it wouldn’t be surprising to see a slightly hawkish tilt to the minutes. The question is whether the Fed is adhering to that view as USD maintains its strength.

–The contract with the most open interest on the eurodollar strip is EDZ9, with 1.612m, up nearly 17k yesterday.  Next closest is EDU9 with 1.477m. There was heavy buying of EDZ9 9787c, for 7.0 covered 9762.0 and as part of the 9787/9837c spread.  Settled 6.5 vs 9760.5.  These are new buys with OI +36.7k.  This strike requires a couple of eases by year-end to be in the money.  Fed fund contracts trimmed odds of easing this year, with FFF0 down 3.5 bps to 9785.5, almost exactly one-quarter pct lower in yield than the expiring May contract at 9760.75.   

–Curve flattened yesterday, with the 2y up 3.5 bps to 2.256 and tens +1.4 to 2.426. –The US administration is threatening further tech blacklisting.  However, copper is at a new low this morning 2.6975 HGN9, having ticked as high as just over $3 in the middle of April.  A decline of around 10% in a month.  

Interesting Reuters report on Huawei (thanks Marco)

Posted on May 22, 2019 at 5:12 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

No risk in corporate debt *UNLESS THERE’S A DOWNTURN

May 21, 2019

–Yields backed up modestly yesterday with tens +2 bps to 2.412% and reds through golds -2.0 to -2.5.  The administrations is apparently softening some restrictions on Huawei, leading to a small bounce in risk assets.

–Not much new in Clarida’s comments yesterday.  He repeated that the neutral rate is low and said that inflation has been less responsive to resource slack.  Last night, Powell gave a balanced speech about the risks of corporate debt.  Though attuned to the risks, he doesn’t believe they pose a threat as compared to the subprime crisis.  However, he did acknowledge that a downturn in the economy would bring significant stress to some companies.  From the speech: ” Business debt relative to the size of the economy is at historic highs. Corporate debt relative to the book value of assets is at the upper end of its range over the past few decades. And investment-grade corporate debt has shifted closer to the edge of speculative grade.”  He concludes that the present situation doesn’t present notable risks to financial stability.  Clearly, the Fed is monitoring the situation.  While Powell says that the US financial system is better able to withstand stress, I have attached a chart of Deutsche and the Italy Bank index.  Financial spillovers are hard to quantify.

–Also I have attached a chart from the St Louis Fed which shows a pretty significant drop in Commercial and Industrial loans this year after strong growth in 2018.  A temporary pullback or a sustained fade of last year’s stimulus?

–Yesterday’s largest trades were replacement of wings as June options expire Friday.   For example, TYQ 133c bought for 2 in size of 100k.  TYQ 132 thru 134.5 calls all settled 2.

–Powell speech link:

Posted on May 21, 2019 at 5:01 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Chicago Fed National Activity

Posted on May 20, 2019 at 9:37 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Fed talks

May 20, 2019

–Equity futures opened higher last night but have now reversed into negative territory as news headlines splash stories about the fallout from Google cutting Huawei’s access to critical products.  Oh, and the US sailed a warship near the Scarborough Shoal which China claims in the South Sea, prompting a warning from Beijing to stop “provocative actions” (according to the South China Morning Post).  And, the US ambassador to China scheduled a visit to Tibet just for good measure.  Big hitter, the Lama.  Finally, Trump threatened the end of Iran, if it chose to fight with the US.  Copper near new lows.  Oil a bit higher.  Bitcoin surged over 700 to re-test 8000.  
–Speeches today by Fed officials.  Clarida at 1:05 on the Fed’s communication strategy, and at 7:00 pm Chairman Powell will discuss ‘Risks to our Financial System’.  This morning brings the Chicago Fed National Activity Index, expected -0.33 from -0.15 last.

–Friday saw yields edge a bit lower with tens down half a bp to 2.393%.  Reds through golds +1.0 to +1.5.  Early in the day, July/Aug Fed Fund spread traded as low as -5.0 (settled -4.0), an indication that odds are rising for a possible ease at the July 30 FOMC.  The most negative spread is Aug/Oct at -8.5. which targets the Sept FOMC as the most probable time for a Fed cut. 

Posted on May 20, 2019 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options