For now, higher for longer has the upper hand

Feb 26, 2024

–Friday featured further curve inversion from reds back as easing expectations are squeezed out of near term pricing.  2/10 treasury spread fell to a new recent low -43 bps (-4.2 on the day).  In 2023, 2/10 has a range from  -108 to -16.   In 2024 the high is -16.5 and the low for the year is right here.  On the SOFR curve the red/green pack spread range in 2024 is +1.6 on 16-Jan to -26.25, Friday settle.  Low in December’23 was -35.  Low in Sept -57,  Low in June -63.25.  

–A large trade Friday was a buyer of 35k SFRZ4 9450/9437.5/9412.5/9400p condor for 1.0 covered 9544 to 9548.  So net premium was less than 1.  Obviously, this trade needs the Fed to re-start the tightening process.  Note that the top put spread, 9450/9437.5 settled 1.5 vs 9551.  SFRZ4 9300p settled 1.75.

–A friend (thanks JK) highlighted an interesting post by Jim Bianco, responding to Mark Zandi.  Zandi says the Fed should cut, because stable inflation & employment have been achieved and FF at “…5.5% is difficult to justify, as it is 3 pct higher than the Fed’s own estimate of r-star.”  Bianco responds that BofA’s Global Financial Stress Indicator shows the LEAST stress in 4 years. “In other words, 5.50% is NOT a stressful rate. The Global Financial Stress Indicator above says markets are enjoying the least amount of stress at any time in the last four years. — Restated bluntly, a 5.5% funds rate is not restraining anything. So, cuts are not necessary.”

–Dudley’s inputs for financial conditions were: long and short term rates, the value of USD, equity prices, credit spreads.  Obviously financial conditions are NOT the same as financial stress.  Clearly financial conditions re: FF have been constant since July, but the 10y yield is down 75 bps from October’s high. DXY hit a peak near 115 in 2022, was 107 in Oct and is now 104.  Big cap tech as a proxy for stocks have soared.  Credit spreads are at pre-pandemic low levels.  In general conditions are easier than they were.

–I suppose Zandi could have re-stated to say real rates are high and restrictive, there’s a lot of debt that needs to be rolled, consumers appear to be pulling back and employment is likely to weaken, so modest cuts can be justified.  Low financial stress now can turn fairly rapidly into tomorrow’s pain, as was seen in 2001.  The snapshots presented by both Zandi and Bianco don’t really capture how the rest of the film might play out, but they do capture the core opposing viewpoints of the market.  

Posted on February 26, 2024 at 5:42 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Quiet Firing

February 25, 2024 – Weekly Comment

The big data point of the week will likely be PCE prices on Thursday.  Month-over-month is expected to show some acceleration with headline +0.3 from +0.2 and Core +0.4 from +0.2.  Yoy measures are expected 2.4% from 2.6% and Core 2.8% from 2.9%.  The concern of course, is possible near-term reacceleration.  Powell and others have noted that goods inflation has come down appreciably, but core services have been much slower to recede.  The implication has been that unemployment needs to increase, euphemistically “the labor market needs to come into better balance” and that equity prices need to decline.

With respect to equity prices and labor, Scott Galloway in a note titled ‘Corporate Ozempic’ cites the amazing revenue and profit increases in some of the big tech firms, concluding that AI is a huge factor in sparking lay-offs that support the bottom line:

What’s really going on? I believe AI is playing a larger role in layoffs than CEOs are willing to admit. There have been hints: IBM’s chief said the company plans to pause hiring for positions that could be replaced by AI, and UPS acknowledged that AI factored into its recent layoffs. But as a general rule, expect a CEO to be reluctant to state on an earnings call that the fastest-growing technology in history is already giving her “the ability to lay off people without any impact on the top-line.” 

You’ve heard of “quiet quitting”.  Call this “quiet firing”.

A more muted outlook on AI was espoused by NY Fed Pres John Williams in an interview with Axios:

“One way to think of it is AI is – and this is my own, but based on what I heard from others – is AI is just that new thing that’s going to get us that 1% to 1.5% productivity growth that we’ve been getting for decades or even a century.   
It’s the thing that gets us that, just like computers did or other changes in technology and how we produce things in the economy.  So it’s just the thing that gets us that 1% to 1.5% productivity growth.

The other view, which I think has some support, is AI is more of a general purpose technology. …So there is a possibility that we could get a decade or more faster productivity growth if this really is its general purpose and revolution.  You can’t exclude that.”

“Today we produce a very small share of computers and chips.  It’s produced in other countries, which just means that that productivity growth might happen in other countries more than it happens here.”

We have an incredibly complex economy; the outlook needs to be analyzed by both policymakers and investors.  Is it more complex than the Greenspan years?  Perhaps, but many challenges of price and asset measurement were voiced by Greenspan then, perhaps most memorably with this line from Dec 1996:

“But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”

This is an appropriate look back, as Japan’s Nikkei only last week exceeded the 1989 high.  Greenspan’s view was that prices are set by millions of knowledgeable investors, and that the central bank can only clean up afterwards (from Jackson Hole, 1999):

To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes.

History tells us that sharp reversals in confidence happen abruptly, most often with little advance notice.

Enough with the Greenspan stuff (though both speeches are linked at bottom and have fascinating insights).  Switching from AI to more prosaic concerns about food production, here’s a chart of the BBG Agricultural Commodity Index:

From this chart, it’s clear that prices are deflating.  Call me crazy but I think food is more important than AI.  There’s hardly a day that goes by that at least one snippet about farmer protests doesn’t pop up.  Most frequently it’s about tractors clogging traffic in European cities. If one googles “Angry farmers” the results point mostly to the French, who are apparently madder than most, taking the boiling point to the extreme by throwing eggs at Macron.  Angry.  However, “farmer protests” gives results across Europe, India, and the US.  I’m making light of a situation that should be taken seriously.  Food supplies aren’t to be trifled with, a fact that appears to have escaped politicians imposing green regulations on growers.


The yield curve continued to flatten/invert last week.  Last week I highlighted the red/green sofr pack spread which I had expected to hold the lower channel line.  It broke that level (-19) and settled -26.25.  On the week SFRM4 was -5.0 to 9490, SFRM5 (red) was -5.5 to 9601.5, SFRM6 (green) +2.0 to 9633.0 and SFRM7 (blue) +6.0 to 9633.0 (same as M6).  On the treasury curve, 2/10 moved similarly to red/green, falling 7 from -36 to -43 (4.685%/4.255%).

Given rhetoric from Fed officials and renewed inflation concerns, the market continues to push back the timing of Fed cuts and lessen the total magnitude.  The most inverted SOFR 1-year calendar has moved back a slot from SFRH4/H5 at -110.25 to SFRM4/M5 at -111.5.  On Feb 1, SFRH4/H5 settled -160.5, so low to high has been an astonishing 50 bps just this month.   

On the treasury curve the two-year rose 3.3 bps to 4.685% while the thirty-year fell 6.8 bps to 4.378%.   

On Monday Treasury auctions $65b in 2’s and $64b in 5’s, followed on Tuesday by $42b in 7’s.  With the addition of t-bill auctions, on the first two days of the week $398 billion in debt will be sold.  Of course, a large amount of bills and notes are maturing, so much of the supply will simply be absorbed by rolls.  However, it’s still worth noting that $400 billion used to be a significant deficit for an entire year.  There’s recently been concern that corporates won’t be able to roll existing debt at favorable terms.  The treasury seems to assume that bond issuance will never encounter a bout of indigestion. 

UST 2Y465.2468.53.3 wi 465.7
UST 5Y428.6428.2-0.4 wi 426.7
UST 10Y429.3425.6-3.7
UST 30Y444.6437.8-6.8
GERM 2Y281.6285.33.7
GERM 10Y240.2236.3-3.9
JPN 20Y151.2144.5-6.7
CHINA 10Y243.9240.0-3.9
SOFR H4/H5-115.0-110.34.8
SOFR H5/H6-45.5-53.0-7.5
SOFR H6/H73.0-1.5-4.5
CRUDE (CLJ4)78.4676.49-1.97

Posted on February 25, 2024 at 11:53 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

What’s the rush?

February 23, 2024

–Hard flattener yesterday as the higher for longer theme dominated.  Several Fed officials including Waller, “What’s the rush?” Jefferson and Cook echoed the same message of patience with respect to rate cuts.  Cook gave a thorough overview of the economy and did note some deterioration of household balance sheets: [unless they’re long NVDA].  

In addition, consumer spending growth may face increasing headwinds from deteriorating household balance sheets. Savings built up during the pandemic are diminishing, especially for those with low or moderate incomes. Some measures of credit use, such as credit card and buy-now-pay-later use and the share of households carrying a credit card balance, have risen above their pre-pandemic levels. And delinquencies on auto loans and credit cards, which fell to near-record lows during the pandemic, have risen back to near their long-run averages. Thus, although the consumer has been surprisingly resilient, there are reasons to expect some moderation going forward.

Most commentators seem to think households have solid balance sheets, which may be true in aggregate due to wealth disparity, but not for a large percentage of consumers.  The question becomes “how long can a smaller group of households maintain aggregate spending?” Of course, pre-election gov’t efforts to juice the economy might mask underlying problems…for a while.

–The two-year yield jumped 6 bps to 4.712%, while the 10y was nearly unch’d at 4.325% and 30s fell by 3.7 bps to 4.462%.  On the SOFR curve reds -6.625, greens -2.25, blues -0.25 and golds +1.75.  I attached a couple of charts showing notable spread shifts.  First, on the treasury curve 5/10 inverted for the first time since December (4.33/4.325), having been as high as +12.5 in Jan. 

Second, in SOFR, the first one-year calendar, H4/H5 at -106.75 is no longer the most inverted, as the second slot M4/M5 settled -108.5.  It’s all indicative of the same sentiment, namely that the Fed is going to slow-play any cuts.  SFRH4/H5 had actually settled as low as -163.5 in mid-Jan (when 5/10 was +12.5).  Now all the one-year spreads suggest only about 100 bps of ease over a given year.  (FFG4/G5 settle -95 and FFJ4/J5 settle -107.5).

–Art Main of TJM sums up SOFR options plays:

A notable theme was liquidation of upside on SFRU4 and SFRZ4 via call spreads and call condors as follows:

-30k SFRU4 95.25/95.4375 call spread at 5.75
-20k SFRU4 95.00/95.50/95.75/96.25 call condor from 13 to 12.75
-20k SFRZ4 95.50/96.25/98.00/98.75 call condor from 19 to 18.75
-20k SFRZ4 95.50/96.50/97.50/98.50 call condor from 21 to 20.5

From a new directional risk perspective flows were balanced with the most notable as follows:

+8k SFRJ4 95.25/95.75 call spread covered 94.91 delta .10 at 1.75
+10k SFRK4 95.0625/95.1875 call spread covered 94.925 delta .10
+15k SFRM4 94.875/95.00/95.125 call fly from 2.25 to 2.5
+9.5k SFRM4 95.50/96.00/96.50 call fly at 1.25

+55k SFRJ4 94.9375/94.8125/94.75/94.625 put condor from 4.875 to 5
+20k SFRU4 95.25/95.00 SFRN4 94.875/94.625 put spread at 7.5 (+SFRU4 -SFRN4)

+8k 2QM4 96.00/95.625 put spread vs. 2QJ4 96.00 put at 0.5 (+2QM4 -2QJ4)

Posted on February 23, 2024 at 5:26 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nikkei and NVDA

February 22, 2024

–Two dominant stories this morning are Japan’s Nikkei finally surpassing the high from 1989, and NVDA soaring to new highs after hours.  I suppose a natural comparison to make is how the Nikkei looked in 1989 compared to NVDA now.  At the end of 1988 NKY was around 30159 and in December 1989 topped, at around 38600, a blistering gain of 28%.  NVDA jumped 13% after yesterday’s close, adding about $225 billion in market cap.

–I suppose the other linked question is what the central banks are going to do about it.  In the late 1990’s irrational exuberance era, Greenspan didn’t really lean into it, suggesting instead that the Fed would just clean up after the winners and losers were shaken out.  In the case of the Fed, yesterday’s minutes said members expressed caution about easing too quickly.  Does the BOJ look to ‘normalize’ funding rates in April, following year-end?  

–In US rates, fives and tens both saw yields rise by 4.8 bps to 4.295% and 4.321%.  On the SOFR strip reds fell 5.75 to 9610.25 (~4.9%) and greens -5.0 to 9630 (4.7%).  One interesting trade in SOFR was a new seller of 35k SFRZ4 9475/9525 strangle at 69 covered 9558.5.  Open int in both strikes up >20k so trade is new, settled 11.0 in put and 57.25 in call, so 68.75 ref 9557.0s.  Obviously the call is in the money, but if the Fed holds steady, then SFRZ4 should roll down to SFRU4 which settled exactly at 9525.  Same strangle in SFRU4 settled 40, with calls 30.5s.

–News today includes Chgo Fed National Activity, Jobless Claims, expected 215k, PMI Composite expected 51.9 from 52, and Existing Home Sales.

below from

Posted on February 22, 2024 at 5:49 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

They still like April TY puts

February 21, 2024

–Light volume Tuesday with yields edging a bit lower.  Tens fell 2 bps (from Friday’s level) to 4.273%.  Red SOFR pack strongest on the strip settling up 5 at avg price 9616.  As March treasury options expire on Friday, focus has shifted to April options, primarily puts, which in turn has accelerated the roll in TY.  About 6% of open interest has shifted to TYM4 with shorter durations having rolled about 4%.  DV01 on TYM4 is over 5% larger than TYH4 which is also a likely factor in spurring the roll. Buyer yesterday of another 20k TYJ 106.5p which settled 5 with -0.06d, open interest up 18.5k (adding).  Market makers selling April puts need deltas in TYM4 to be properly hedged.

–On the shorter end, buyer of about 35k SFRU4 9500p for 16 to 16.5 covered 9531 to 31.5.  Settled 16.75 vs SFRU4 9529 with open interest up 19k.   In terms of ease timing, FFN4 settled 9493.0 or 5.07%.  Current EFFR is 5.33% or 9467, which is exactly where FFG4 is pegged.  One cut would move EFFR to 5.08% or 9492.  The next FOMC meetings are March 20, May 1 and June 12.  FFK4 still prices for some chance of an ease at the May 1 meeting settling at 9476.5.  However, July is the nearest contract which fully reflects one 25 bp cut.

–On my weekend note I compared the May through Sept sell-off in SFRM4 with current price action in SFRH5 and suggested if the pattern holds and the Fed stands pat, then put plays on SFRH5 make sense.  Someone had a similar thought and bought 9k H5 9625/9562.5/9500p fly which settled 13 ref 9590.  Obviously the price target isn’t as low as the SFRM4 price, but a stingy Fed should see H5 grind lower on the roll.    

–Today brings $16 billion of 20s to be auctioned, followed by FOMC minutes. NVDA reports after the close (Astonishing $1.7t market cap).  There are indications that NQH4 has rolled over, but this afternoon will be important for near term direction.   

Posted on February 21, 2024 at 5:11 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

PBOC steps in front of the Fed

February 20, 2024

–China cut its 5 year loan prime rate by 25 bps to 3.95%.  However, US equity futures are moderately lower as of this writing on Tuesday morning.

–Friday featured continued buying of TYJ puts.  TYJ 109.5/108.5ps settled 18 with open interest +15k in both strikes.  Late buying of TYJ 106.5p and 106p for 6 and 5 (settlement prices), with open int +21k and +36k.  On the day, April TY puts gained 131k contracts while March puts dropped 51k.  March options expire Friday.

–SOFR contracts continue to be weighed down as Fed cuts drift further out of focus.  Weakest contract on SOFR strip was SFRM5, down 10 at 9607.  SFRM4 was -5 at 9495; buyer of 35k SFRM4 9493.75/9481.25/9468.75p fly for 3.25 to 3.5.  

–New recent low in 2/10 at -36 bps, though it’s just around the 50% pullback from the Dec low of -53.5 to the Jan high -16.5.

Posted on February 20, 2024 at 5:34 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Presidents’ Day market notes

February 18, 2024 – Weekly Comment

Just three brief observations this week.  1) SFRM4, SFRH5 comparison 2) Huge increases in TYJ put buying 3) Red/green SOFR calendar

In the beginning of May 2023, when concerns about the (regional) banking system were still tender, SFRM4 traded around 9675.  The high settle had been 9696 on May 4.  It then began a protracted slide with a low settle of 9474 in late September.  In May, SFRM4 was about 13 months forward.  At the September low of 9474 it was just under 9 months forward.  Note that on both May 3 and July 26 the Fed tightened 25 bps, skipping the June meeting.  Note also that in April 2023 CPI was 4.8, in May 2023, 4.0 and in June 3.0.  Last week’s reading for January was 3.1. The July hike has been the last one.

Now consider SFRH5, which is currently about 13 months forward.  It recently traded above 9650 (high settle 9664.5 on Jan 12) somewhat close to where SFRM4 was at the same time of its life.  However, as noted above, hikes had occurred in May and July.  The recent sell off in SFRH5 hasn’t been quite as fierce as the spring drop in SFRM4, but if the same general pattern were to hold (and the Fed stands pat), one might expect another 100 bps or so to the downside by June.  SFRH5 settled Friday at 9586.  With that in mind, consider SFRH5 put spreads or midcurve June’24 put structures on SFRM5.  In August to Sept SFRM4/U4 was -37 to -25; when SFRM4 traded to 9475 SFRU4 was around 9502.  Given that level of inversion, one might target 9525 to 9500 in SFRM5 (current 9607) the contract just forward from SFRH5.  For example, 0QM 9562.5/9537.5/9512.5/9487.5 put condor settled 3.75.  Assuming a price of 4, breakevens are 9558.5 and 9491.5.  Max value 25 between the center two strikes.  Expiration 6/14/24.

This trade is sort of a ‘Larry Summers’ play.  Last week he said, “There’s a meaningful chance – maybe it’s 15% – that the next move is going to be upward in rates, not downwards.”  (How many can I put you down for Larry?).  Actually, if talking about the ‘next move’ in terms of an actual hike in the FF target, I think there’s way less than a 15% chance.  However, that doesn’t mean that the forward curve can’t shift to higher rates.  Higher forward rates should be marginally negative for equities and employment, which in turn should keep Core Service inflation on a downward path.  The Fed does not have to overtly hike.  Leaving short rates well above inflation works to restrain the economy over time, and coming corporate debt rollovers will become more difficult.

This brings us to point number two, the tremendous amount of buying in TY puts last week, mostly April expiry.  Between Thursday and Friday, total open interest in TYJ puts went up by 260k contracts, about 130k each day (to a total of 665.7k).  Clearly some of this buying is replacing coverage of March options, which expire Friday.  However, it’s still somewhat surprising to see aggressive buys just prior to a three-day weekend, in front of a week that contains little in the way of economic news/data.  On Friday there was a late buyer of 15k TYJ4 106.5p for 6 (OI +21k to 29k) and 40k TYJ4 106p for 5 (OI +36k to 41.5k). Early buy of 10k TYJ4 108.5/107.5ps for 11; relatively small delta buys.  Thursday’s buys in 110 and 109.5 puts were higher delta, but in any case the overall totals are impressive.  On a week which featured higher than expected CPI and PPI data, the 5y yield rose 13.7 bps to 4.286% and tens nearly 11 bps to 4.293%.  I would note that April options expire 22-March, just after the FOMC.  NFP is March 8, and Powell testimony in front of Congress is March 7.

On the SOFR curve SFRH5 saw the largest net decline, settling -23.5 to 9586.  More deferred contracts fell the same sort of magnitude as the 5y and 10y.  In this regard, it’s worth looking at the constant maturity red/green SOFR pack spread; red pack is currently the average price of 2025 contracts and green pack is avg of 2026 contracts. [chart below]  This spread fell by about 7 bps on the week to -19.5, with the red pack  -21 (9632 to 9611) and the green pack -14.5 (9645 to 9630.5). [rounded].  As shown on the chart below, this spread is now at a strong support area.  My bias is that it will hold, but if Larry Summers’ sentiment gains wider currency then the spread could test -35 and all rate futures would likely be under selling pressure.

One last quick note concerns the strength in WTI.  CLJ4 settled 78.46, up 1.69 on the week; highest settle since early Nov.  Near contracts trade at a growing premium to deferred.  For example, April 24 contract settled 78.46 and April’25 (CLJ5) at 72.39, a spread of 6.07.  On a rolling basis this spread was just 0.28 in December.  Strength in near contracts and widening spreads occurred last summer, culminating with a September high in the 2nd to 14th monthly contract (1-yr) spread of 12.20.  This period also corresponded with a surge in treasury yields. (Thanks PMV)

One year rolling CL spread, 2nd to 14th.

UST 2Y448.6465.216.6
UST 5Y414.9428.613.7
UST 10Y418.5429.310.8
UST 30Y438.0444.66.6
GERM 2Y271.6281.610.0
GERM 10Y238.2240.22.0
JPN 20Y150.9151.20.3
CHINA 10Y243.9243.90.0
SOFR H4/H5-132.0-115.017.0
SOFR H5/H6-38.0-45.5-7.5
SOFR H6/H76.53.0-3.5
CRUDE (CLJ4)76.7778.461.69
Posted on February 18, 2024 at 2:02 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Chunky FVJ and TYJ put buys

February 16, 2024

–Large feature yesterday was TYJ and FVJ put buying.  A few spread details are shown at bottom.  While open interest increases were huge in TYJ puts, which added 132k open in total, (mostly in TYJ 109.5p, +79k), there was clearly some rolling from March to April puts.  In futures, TYH4 open interest fell 28.5k and TYM4 increased just 23k.  So large put trades, which I would say argue for a bearish outlook today and beyond, didn’t really translate into an increase in futures OI.  In any case, as of this writing, TYH is 109-30, -7.5 and, depending on this morning’s data, could easily test the CPI low of 109-17.

–In FV the picture is more clearly bearish:  Large put buyer and OI up in futures, both FVH, +29k and FVM, +25k.

–Note that yields ended slightly lower across the board.  5y yield -2.8 bps to 4.215% and 10y -2.5 to 4.24%.

–April options expire 22-March, 2 days after the March 20 FOMC.  Also, it was announced yesterday that Powell will testify in front of Congress on Thursday, March 7, the day before NFP.  The buy of 33k TY week2 110/108.5ps for 20, covered 110-06, 22d, occurred after the Powell announcement.  Week-2 puts expire on 8-March, Employment day.

–This morning PPI is released, expected yoy 0.8 from 1.0 last, with Core yoy 1.7 from 1.8.

–Monday is a US holiday.  

+15k TYJ 110/108.5ps 22

+22k TYJ 109.5p 28

+50k FVJ 106.5p covered 107-107, 29d, 22 paid

+5k TYH4 109.5p 7
+33k TY wk2 110/108.5ps cov 110-06, 22d, 20 paid

TYM4 settled 110-23 
In TYJ puts the largest increase in open interest was 109.5p, which settled 32, OI gained 79.4k according to prelims
TYJ 108p settled 13 with an increase in OI of 13.3k
In all April puts, open interest added a whopping 132k
The week-2 put spread was also new; settled 30 with OI +37.3k and 24.5k 

FVJM4 settled 107-08
FVJ 106.5p settled 24.5 with OI +42.6

Posted on February 16, 2024 at 5:30 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Sometimes there’s a small lag

February 15, 2024

–News today includes Empire State Mfg which plunged last time to -43.7, so likely to see a bounce.  Retail Sales expected -0.2 m/m vs +0.6 last.  Ex auto and gas +0.2 expected vs +0.6 last.  Several analysts are warning of a large downside miss on Retail Sales.  Philly Fed was -10.6 last.

–Just about every news site has ‘Japan Slips Into Recession’ as a lead story, along with ‘UK falls into recession’.  $/yen is holding above 150 and Nikkei continues to make new highs; it was 30700 at the end of October and is 38150 now, just three and a half months later (+24%).  It’s like BOJ’s Ueda said in Sintra last June, “We haven’t had any serious monetary tightening for three decades” and amusingly added, “So in terms of that, the lag in the effect of monetary policy could be at least 25 years.”  *nervous laughter by the other central bankers.
–Equity melt-up at end of day.  SPX +1%.

–A few big trades: New stuff in treasuries: +50k TYJ 108/112 risk reveral vs 110-00, paid 3 for put.  Open interest up over 40k in both strikes.  As a comparison, with TYM4 having settled 110-175, I checked a late mkt 108.5/112.5 rr vs 110-16, 42d 1/2 for put.  Just before CPI premium favored the call in equidistant rr’s.  Also looked like new buying in TYH4 109.5p, followed by new sales in 109.25 and 109 puts.  March options expire a week from Friday.  Settles vs TYH4 110-00+, 15, 10, 7.

–In SOFR a couple of large exits:  SFRZ4 9400/9350ps 1.5 paid 100k vs 9463 to 9461 with 5d.  This settled 2.75 / 1.75 (so 1.0) vs 9567.0. 0.5/1.5 
–SFRZ4 9575/9500/9425p 1x3x2 fly 11.5 paid 25k settled 47.25/13.75/3.75 or 13.5 (has 4 to 5 call delta).  Open interest -25k, -61k, -38k.

Posted on February 15, 2024 at 5:45 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Tie one end of the string to the tooth, and the other end to a doorknob

February 14, 2024

-Headline CPI +3.1% yoy vs expected 2.9.  Core 3.9% vs expected 3.7%.  SuperCore was +0.85 on the month in Jan vs 0.34 in Jan.  3-month annualized was 6.7% in Jan vs 4.0 in Dec.  The reversal in favorable inflation readings caused a 25 bp plunge in red SOFR contracts, essentially extracting one ease like a sore tooth.  SFRZ4 settled 9558.5, -23.5.  At option expiration in Dec’23, SFRZ3 contract pegged the 9462.5 strike.  So the current Z4 price is about 100 higher, or 4 eases as compared to the 3 eases suggested by the Fed dots.  SPX -1.4%.  Nasdaq Comp -1.8%.  Ten year yield surged 14.6 bps to 4.314%, though the curve flattened with 2s up 18.4 to 4.651%.  2/10 closed at the bottom of the recent range, -33.7.

–Near calendars settled at new highs.  SFRH4/M4 three-month spread settled at -24 (9472/9496) up 10 bps on the day as H4 fell 4.5 and M4 fell 14.5.  SFRH4 puts were heavily offered at 1 a couple of weeks ago and now settled 3 in-the-money and traded 6 late.  There had been a large buyer of May 9475 puts for 2 (SFRM4 underlying); these settled 5.25. The prospect for an ease in March had already been priced out after Powell’s press conference and subsequent Fed speakers.  The next meeting after March is May 1.  On no ease, the FFK4 contract should converge to the current EFFR or 9467 (FFG3 settled 9467).  On an ease of 25, EFFR should avg 5.088 or 9491.2 in May, given a pass in March. Yesterday, FFK4 settled 9477 (-8.0), essentially 60% for no ease, 40% for ease.  The high settle in this contract was 9519.5 on Dec 27!  At the last FOMC on Jan 31 it settled 9503.5 while April (FFJ4) settled 9481.  

–Uncertainty remains high.  The peak SOFR contract is now SFRH6 at a price of 9628.5 or around 3.75%.  Discounting forward earnings estimates at 3.75% vs 3.25 to 3.5% (SFRH6 was 9678.5 at the start of the month) suggests lower equity prices.  Retail Sales tomorrow. 

Posted on February 14, 2024 at 5:25 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options