Non-profits saw solid demand…oh great

May 30, 2024

–Both stocks and bonds weak.  7 year auction tailed by 1.3 bps at a yield of 4.65% but treasuries stabilized post-auction.  On the day, the ten year yield rose 8.2 bps to a new recent high of 4.622%.  Treasury rolls have been substantially completed with heavy trade yesterday.  Of course, June open interest has plunged in every treasury contract as expiration nears.  I’m not sure if there is anything to read into this, but AGGREGATE open interest fell across UST contracts. I.e. September futures didn’t increase anywhere close to June’s losses (if data on prelim report is correct).  For example, TYM OI fell 556k, but TYU only added 473k.  UXYM OI fell 353k but UXYU only rose 272k.  Somewhat strange given a move to higher yields, huge supply issues and a jump in implied vol. (TYU4 atm 108^ 2’32 or 6.0 vs Tuesday atm  108.5^ 2’27 or 5.7).

–Today’s news includes Q1 GDP 2nd estimate at 1.3% from 1.6% with Price Index 3.1% and Core 3.7%. 
Jobless Claims expected 217k
PCE prices tomorrow.

–Large new sale of 0QU 9550^ 51.5/52.  Settled 51.5 vs 9551.0 in SFRU5.  Breakevens approx 4% and 5% with 106 days until expiry.
Exit buyer of 20k 0QM/2QM 9600 call spread for 4.5 to 5.0, paying up for the 2QM calls.  As noted over the weekend, SFRM5/SFRM6 spread has continued to decline as reds bore the brunt of selling given the Fed’s insistence that rate cuts aren’t necessary in the short term.  On May 1, M5/M6 was -44, on Friday the low was -54.5, though yesterday it settled -48.5.  Being short 2QM 9600c was a bit close for comfort with SFRM6 settling 9583.

–Just a couple of cherry-picked lines from Beige Book: (they’re all doing it…I just admit it)

Retail spending was flat to up slightly, reflecting lower discretionary spending and heightened price sensitivity among consumers.
Wage growth remained mostly moderate, though some Districts reported more modest increases.

Contacts in most Districts noted consumers pushed back against additional price increases, which led to smaller profit margins as input prices rose on average.

Nonprofits and community organizations cited continued solid demand for their services… [ I don’t like the sounds of that one…]

Posted on May 30, 2024 at 5:13 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Supply weighs on bonds

May 29, 2024

–Yields rose yesterday as 2 and 5 year auctions underwhelmed. 5y was 4.54 pre-auction but tailed over 1 bp with a result of 4.553%.  Ten year yield up 7.4 bps to 4.54%.  New high this morning in 10y JGB yield, over 1.10%.  Contributing to weakness was buying of 26k each TYN 108.5/111.5 strangle for 45 and 108.5/111.5 strangle for 38-40.  TYN4 108.5p has a delta of -0.47, settled 36, with a fall in open interest of 34k contracts.  TYU4 settled 108-195.

–7 year auction today, followed by Beige Book.

–The weekend of May 18 I suggested that the GME pop and crash indicated a lack of firepower by spec ‘bros’.  My thought was to short online betting companies, which I did by buying DraftKing puts.  The thesis appeared to be working, but was helped along yesterday as Illinois proposed raising its sports betting tax, which is currently 15%, to as high as 40% on adjusted gross revenue of sports gaming companies.  DKNG fell 10.3%.  I’ll bet it goes lower. 

–In an attempt to keep up with worldwide mayhem, there were 42 shootings, 10 fatally in Chicago over the Memorial Day weekend (included a 5 year old girl).  The network news show I happened to be watching said there were 11 fatalities last year, so this year represents a drop of 9%.  Feel better now? 

0QU 9575/9550ps vs 9563, 26k sold at 13.0
SFRZ4 9518.75/9543.75cs vs 9501, 13d 5.0 paid 15k
TYU4 105/112 rr vs 109-000, 34d 5k call sold flat
0QU 9575/9625/9650/9700c condor 10 paid 5k
Late,,,heavy buying TYN strangles
108.5/111.5 strangle 38-40 paid 26k
108.5/110.5 strangle 45 paid 26k
108.5p settle 0’36
110.5c settle 0’06
111.5c settle 0’02

Posted on May 29, 2024 at 5:31 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Short end yields under pressure, long end eases

May 28, 2024

–Friday featured new recent lows in some curve measures.  For example, 2/10 hit a new low for the year of -48.5 (though low in December was -53.6).  5/30 hit a recent low of 4 bps, not quite at April’s low of 1.7.  On the SOFR strip, SFRM5/M6 posted a new low -54.5, down 1.5 on the day.  This spread had a high print of +0.5 this year (January).  

–Today’s news includes Consumer Confidence, expected 95.9 from 97 last.  Speakers Cook and Daly.  Kashkari says the Fed can take its time cutting rates; the economy has remained “remarkably resilient”.  Treasury auctions both 2 and 5 year notes, followed by 2y FRN and 7’s tomorrow.  

Link below is a dynamic chart showing the relative movements of Federal spending on interest payments and defense.

Posted on May 28, 2024 at 5:28 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options


May 27, 2024 – Weekly note

Japan 10y yield 1.00%, new high for the year.  Was 61 bps on Dec 29, 2023. Now at the highest since 2012.  The 20y yield is 1.856% also at a new high. Highest since 2011.

The weakest contract on the SOFR strip was SFRM5, down 17.5 on the week at 9540.  On April 4, less than 2 months ago, SFRZ4 was 9542.  That contract is now 9499.5.  Roll down has been fierce given the context of steady (restrictive) Fed policy.

On Dec 29, 2023 SFRM5 was 9679.0, a decline of 139 bps on the year as easing expectations have been dramatically pared back.  Chart below is SFRM5/SFRM6 which has fallen like a rock this year as reds have led the way lower.

By contrast, the 2/10 constant maturity treasury spread has only gone from -37 bps on 12/29/23 to -48 currently.  Of course, using constant maturity two-year doesn’t really capture the roll. 

ECB expected to cut on June 6, with both Olli Rehn and Philip Lane citing disinflation trends.  US Fed releases the Beige Book Wednesday.  PCE prices on Friday expected 2.7% yoy with Core 2.8%, both same as last month.  FOMC is June 12.  July Fed Funds are 9467/67.5, exactly pegged to current EFFR of 5.33%, indicating near zero odds of an ease by the Fed. Closing arguments in Trump’s trial expected Tuesday.

Japan’s 20y yield rose 10.4 bps last week while the US 30y was up only 1.2 bps. Do more attractive yields in Japan portend a shift in capital away from US long end? 

On Monday May 20, DJIA made a new high, posted an outside day, and fell into the end of the week. Following NVDA earnings, both SPX and CCMP (Nasdaq Comp) made new highs early, but had outside day ranges and closed lower (Thursday).  Friday featured rebounds, but not to new highs.  VIX ended the week at 11.93, stupidly low given possible reversal patterns in equities. Low risk entry for long VIX structures; exit on new highs in SPX and CCMP.       

UST 2Y482.2494.812.6
UST 5Y444.0452.98.9
UST 10Y441.8446.64.8
UST 30Y455.9457.11.2
GERM 2Y298.6308.710.1
GERM 10Y251.5258.36.8
JPN 20Y175.2185.610.4
CHINA 10Y231.7231.4-0.3
SOFR M4/M5-88.3-74.314.0
SOFR M5/M6-48.0-54.5-6.5
SOFR M6/M7-12.5-17.5-5.0
CRUDE (CLN4)79.5877.72-1.86
Posted on May 27, 2024 at 7:54 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Waller slow walking eases

May 21, 2024

–Quiet session Monday with slight drift towards higher yields.  Tens +1.7 bps to 4.435%.  SFRU4 featured a couple of block sales at 9487 and 9486.5, settled 9486 with open interest down 21.7k so it appears to be liquidation.  Buyer of 20k 0QH5 9475/9424ps for 4.75; settled 4.25 ref 9598.5.  

–Several Fed speakers today but Waller is probably most important at 9:00am.  Titles of his speeches on Feb 22 and March 27 were, ‘What’s the Rush?’ and ‘There’s Still No Rush’.  Not likely to be a big change in tone with respect to easing.  

–NVDA reports tomorrow.  $2.3 trillion market cap.  Friday’s 950^ appears to be around 83 ref 947.80.  

–I will be out for the rest of the week.

Posted on May 21, 2024 at 5:00 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Jokers and Thieves

May 19, 2025 – Weekly Comment

Jokers and thieves

May 19, 2024

Alex Manzara/ Interest Rate Strategy and Execution/

There must be some kind a way outta here
Said the joker to the thief

–Jimi  Hendrix  All Along the Watchtower

The youtube clip is a rendition of this song by Playing for Change, “…using music as a tool for education and social change around the world.”  A lot of fantastic covers by this organization.

This week we had a brief resurrection of meme stocks.  GME and AMC exploded in a starburst followed by flickering embers falling back to earth. Just an interesting market footnote, right?  Maybe, but my theory is that the bros, or apes, or whatever they are called these days, are out of money (and ideas).  I googled “investing apes” and was directed to the subReddit site WallStreetBets.  Yup, Reddit is the site that AI will be mining.  I guess we’ll see how it all works out.

In any case, the short squeeze in GME was short-lived this time.  Why?  My theory is that the first time around, there were government stimulus funds to burn through.  And now…it’s gone. 

So, what are the ramifications for interest rate futures?  I think it means that US rates at the short end are likely to come down.  But the market already reflects that, with heavily inverted calendars in short-rate futures.  For example, SFRM4/SFRM5 closed -100 post-CPI before bouncing back to -88 to end the week.  The high settle in SFRM5 on Wednesday was 9570.5 or 4.295%, still about 100 bps lower than the current Fed Eff rate of 5.33%.  SOFR calendars have reflected the ebbs and flows of more or less easing, but have been continuously biased toward lower rates in the future since late 2022. Of course, new information can always impact perceptions of the future, though sometimes it’s just about flows.  More on that below.

For example, Redfin says that the median home price hit a new record in April of $434k..  Whether that’s actually inflationary or not isn’t clear, but it doesn’t make one think of disinflation and rate cuts.  However, the Redfin release also noted “18% of homes for sale in April had a price cut, up from 12% in April 2023.”  Rick Rieder of Blackrock had an interesting take on Fed policy and inflation:  he thinks cuts may actually cause inflation to recede. “I’m not certain that raising interest rates actually brings down inflation,” Rieder told Bloomberg’s David Westin… “In fact, I would lay out an argument that actually if you cut interest rates, you bring down inflation.” The reason has to do with the bifurcated economy.  High rates help savers who can now afford to pamper themselves with more services due to large interest rate cash flows.  Lower the cash flows (interest income) and lower the demand for expensive services.  I love the example he gave: “The price of a pair of tennis shoes is what it was 20 years ago. If you go to a tennis match, it’s double what it used to be.”  Honestly…who goes to a tennis match? 

Anyway, the bros aren’t the ones with large savings earning interest.  They’re the ones trying to show Wall Street fat cats who’s boss.  And it didn’t work.  Know what else the bros do?   They bet on sports.  (Probably not tennis, Rick).  So, rather than ponder the complications of interest rate strategy, I went right to the source and placed a bet with long puts on one of the online gambling sites. I won’t say which one, but it’s not a casino company…a lot of those have a large Macau presence, and China’s stimulus measures might actually help those companies.  No…I want to isolate the guy in the US who loves sports betting, but now is finding himself strapped for funds.  No more easy short squeezes, no more job-hops for big raises.  We’re now more likely to see advertisements of the sort that Rocket Money is running, to help CUT expenses by canceling subscription services. 

I think the US consumer has turned, in a negative way, and that will feed into softer labor market data.  However, the flows are a bit mixed.  For example, on Friday there was a seller of 50k SFRH5 9600/9650c spreads (exit) at 6.5.  Settled 6.0 ref 9535.0.  Typically, when the Fed starts to cut, they move fairly quickly, but here’s a guy paring back on longs.   

Another thought on flows.  Last week’s TIC data showed a large decline in China’s Q1 holdings of US treasuries.  From BBG: “Beijing offloaded a total of $53.3b of Treasuries and agency bonds combined in the first quarter.”  Below are monthly changes in China and Hong Kong holdings of treasury securities in Q1, March, February and January, in billions:

China, Mainland -$7.6, -$22.7, -$18.6
Hong Kong -$10.3, -$16.0, -$5.7

That’s $48.9b for China and $32b for Hong Kong.  Consider the chart below.  The chart starts at the beginning of the year.  What if it’s all about China’s flows?  Selling US bonds (yields generally increased through Q1 into April), buying gold, and buying copper.  Maybe the increase in US yields and the surge in commodity prices have little to do with forecasts of future inflation, but simply reflect China’s portfolio shift.  From a Thursday BBG article: “China sold a record amount of Treasury and US agency bonds in Q1, highlighting the Asian nation’s move to diversify away from American assets as trade tensions persist.”  Also from BBG regarding China’s sale of 1 trillion yuan ($138 billion) ultra -long special sovereign bonds:
“Bonds with 20-year and 50-year tenors will be offered from May 24 and June 14, respectively. Auctions of the securities will continue until a final batch consisting of 30-year notes goes on sale in November.”  China’s 10y yield was over 2.7% in November and is now 2.3%.  China looks to be locking in low rates for long-term financing (taking out a mortgage to buy unsold homes) while Yellen borrows short, at the highest end of the US rate curve spectrum.   Jokers and thieves.

Should be a quiet week, with little US data coming out before the Memorial Day weekend.  I will be out next week.

UST 2Y486.6482.2-4.4
UST 5Y451.6444.0-7.6
UST 10Y450.2441.8-8.4
UST 30Y464.4455.9-8.5
GERM 2Y296.7298.61.9
GERM 10Y251.7251.5-0.2
JPN 20Y169.2175.26.0thru Oct’23 high
CHINA 10Y232.0231.7-0.3
SOFR M4/M5-82.5-88.3-5.8
SOFR M5/M6-43.0-48.0-5.0
SOFR M6/M7-12.5-12.50.0
CRUDE (CLN4)77.8479.581.74
Posted on May 20, 2024 at 4:42 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Game over

May 17, 2024

–Pressure continues on both the curve and vol.  New recent low in 2/10 spread at -41.4 (2y 4.789, +5.5 and 10y 4.375. +2.1).  Red/green SOFR pack spread also edged to a new low at -31.25 (reds 9585.875, -7.375 and greens 9617.125, -4.5).  With Fed officials throwing cold water on the prospects of near-term ease in the context of a slower economy, price action makes sense, in the short term anyway.  

–Continuous efforts to support the Chinese economy (new plan to buy unsold homes) has rocketed the Hang Seng from 16k to 19.5k in just the past month.  On the other hand, the flash rallies in GME and AMC have likely already run their course, perhaps a sign that the speculative public doesn’t have the same firepower that it did following gov’t stimulus checks.  Not much pullback in copper though; critical inputs to the economic industrial machine probably deserve more attention than meme stocks  

–Waller speaks today on payment innovations at 9:15.  Probably no policy pronouncements, though if there are, no reason to suspect he’d change his HOLD STEADY stance.  Kugler and Powell speak at commencement addresses this weekend.  

Posted on May 17, 2024 at 5:43 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Vol deflation (though not yet apparent in ice cream)

May 16, 2024

–Implied vol was hammered as CPI eased to 3.4% yoy with Core 3.6%.  Retail Sales 0.0% on the month.  As yields plunged, calls on treasuries underperformed.  Attached chart is 1-month TY vol, about as low as it has been since the hiking cycle started.  Ten-year yield fell 9 bps to 4.354%.  TYN4 atm 110^ settled 1’42 vs 110-00s, on Tuesday the atm 109.5^ was 1’55.  On Tuesday with TYU4 109-115, the 19 delta TYN 111.5c settled 16.  Yesterday with futures up 20.5/32s or 41/64s, that same call settled 20.  According to the delta it should have been (41*.19) or up about 8/64’s rather than 4 (ignoring gamma).  Vol hit across curve, including SOFR.  Near SOFR calendar spreads became more inverted as easing pulled forward.  SFRM4/M5 plunged 12 to -100 (9470.25 unch’d/9570.5 +12).  

–The market has taken the CPI report as an “all-clear” running stocks to new highs as the last big piece of news for the month is now in the rearview mirror.  Today’s news includes Philly Fed Mfg, Housing Starts, Jobless Claims, Ind Production. Japan’s Q1 GDP fell 2% annualized, worse than expected.  Powell gives a commencement address on Sunday.

–Is it really all clear?  FT has the following story: Starwood taps credit line as investors pull money due to concerns over RE valuations.  A week ago Starwood CEO Sternlicht warned that regional banks are going to start failing like dominoes…  

Starwood’s $10bn property fund taps credit line as investors pull money

Heavy redemption requests come as fears rise over real estate valuations

From a May 7 interview with Barry Sternlicht, CEO of Starwood

“I think people are looking for these cracks, and you’re going to see the crack develop now,” Sternlicht said. “You’re going to see a regional bank fail every day…or every week, maybe two a week.”

CLASSIC representation of consumer indignation (I’m certainly not going to be the one to tell this little girl that the economy is great):

Posted on May 16, 2024 at 5:17 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options


May 15, 2024

–Copper continues to scream higher, now over $5.  Chart at bottom, but here’s a chart of the July/Sept calendar spread. There’s plenty of nervous excitement about short squeezes in GME and AMC, but less so about a critical input to energy infrastructure which is in supply deficit (according to Druckenmiller, Gromen, etc).  Doesn’t particularly bode well for forward inflation, but that’s a story for the future, not today’s CPI.

–Yields eased yesterday despite higher than expected PPI data, though previous data was revised significantly lower.  M/M was +0.5% both headline and Core but previous months were revised down to -0.1 from +0.2.  Data releases appear to be a bit more volatile recently. Rate futures spiked lower on the initial release, but then popped right back up.  At the end of the day yields were lower, with tens -3.8 bps to 4.443%.  Star performer on the SOFR strip was SFRZ5, +6 on the day to 9589.0 or 4.11%.  SFRZ4/Z5 thus made a new recent low of -77.5 (9511.5/9589).  The most inverted one-year calendar remains the front SFRM4/M5 at -89.0 (9469.5/9558.5).  In February the front (most-inverted) spread was -150 to -160.  

–Powell’s comments accentuated the inversion: from BBG bullet points, “It’s a question of keeping policy at the current rate for longer.   Time will tell if we are sufficiently restrictive.”  There was also a financial stability warning:  LENDING ACTIVITIES BY NONBANKS ARE GROWING VERY, VERY FAST… WE NEED TO MONITOR THAT VERY CAREFULLY, WE WORRY ABOUT THAT FAST GROWTH… MAKES YOU WONDER IF THERE ARE FINANCIAL STABILITY CONCERNS THERE.

–After Powell admitted the miss on SVB, one has to think these comments would lead to heightened surveillance on shadow banking at a time when many companies are facing debt roll-overs with onerous rates.  The NY Fed’s Household survey indicated increased delinquencies.  Rates which remain relatively high into the future reduce the present value of future earnings and maintain pressure on companies (and households) that need to roll debt.

–CPI today expected 0.4 from 0.4 with Core 0.3 from 0.4

yoy 3.4 from 3.5 and Core 3.6 from 3.8

Retail Sales expected 0.4% from 0.7%   

Posted on May 15, 2024 at 5:36 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Labor mandate

May 14, 2024

–Looks like Roaring Kitty has gotten involved in the copper market;  HGN4 is 4.83 this morning, which is up about 25% since March.  Of course GME was up 74% yesterday alone.  

–NFIB Small Business Optimism today, was in the dirt last time at 85.5, now expected 85.2.  Indeed, the job search/placement company is laying off 1000, or 8% of the workforce.  What else do you need to know?  Fed switching to the labor side of the dual mandate?  Indeed. 

–PPI expected 0.3 from 0.2 with Core 0.2 from 0.2.  Yoy expected 2.2 from 2.1 with Core 2.3 from 2.4.   The NY Fed releases its Household Debt and Credit report at 11:00am.  The headlines will blare NEW ALL-TIME HIGHS in credit card debt (it was $1.338T in the last Consumer Credit report to end Q1).  This report includes data on delinquencies, which are also marching higher. 

–Yields fell slightly yesterday, with tens down 2.3 to 4.48%.  On the SOFR strip reds through golds +1 to +3.  2/10 treasury spread at a slight new low -37.4.  Late Friday there were large purchases of July FV and TY puts that were 50+ bps otm.  Yesterday there was a little more of that sort of trade.  However, I am just highlighting a few upside plays:  +40k 2QM4 9650/9656.25 c spd for 0.625.  It doesn’t look that way on the Open Interest sheets, looks more like 20k.  In any case, this is an add or roll down as there were already about 60k 2QM 9656.25/9662.5cs recently bought.  Settles: 9650c 2.5, 9656c 2.0, 9662c 1.5.  Underlying SFRM6 settled 9598.5, so this trade targets 50-60 bps of upside with about 1 month until expiry.  Interestingly, there was also a much longer dated play on the long end of the maturity spectrum:  December TLT 102c were blocked 75k yesterday, said to be a buyer, not sure of price but around 1.07.  The last time TLT was 102 the long bond yield was around 3.90%, so this is another 60-70 bp otm trade.  Finally, an add of +14k SFRZ4 9600/9700cs for 5.5.  Settled 5.25 ref 9509.5.

–Evidence of a consumer-led slowdown appears to be piling up.  No matter how much gov’t supported funding there is for AI data centers (which likely displaces workers) the core of the economy is cooling.  The administration’s response necessarily is to buy votes.  The Fed might lean against more gov’t spending gimmicks, but I wouldn’t count out an ease next month (which obviously is NOT being priced, FFN4 settled 9469 or 5.31 vs current EFFR of 5.33).

Posted on May 14, 2024 at 5:42 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options