Real rioting; virtual currency
June 2, 2020
–DXY is at a new recent low 97.45 and the long end of the treasury curve is simultaneously pressing to new high yields. Curve steepened yesterday with 5/30 above 115 (and 1.5 higher this morning). 2/10 closed 50.5, up 1.7 on the day. Little movement in euro$’s. Ten year yield ended at 66 bps.
–Bitcoin is back above 10000 as of this writing. High of the year has been 10500, the low in March was about 4000. Looks similar to Nasdaq, except that the decline in BTC was much deeper, and the rally will also likely be much more aggressive.
–Once again I note large buy last week of EDM’21/EDM’22 for 6 bps. Settled yesterday at 5.0, while the THREE-MO spread EDM’23/EDU’23 settled 4.0. Back end of curve is where the steepening bias is as Fed officials forwardly guide the near part of the curve to zero. This is making US vol a bit perkier than nearer contracts.
In: Eurodollar Options
Ball of Confusion
June 1, 2020
–Protests, riots and looting give new meaning to ‘flight to safety’. However, equities have barely been dented.
–Friday saw yields fall as the month closed, with tens down 5.7 to 64.4 bps. Curve flattened with 2/10 down 3.9 to 48.8. Vol slightly firmer.
–Today’s news includes ISM Mfg expected 43.7 from 41.5 last. Prices paid expected 42 from 35.3. Friday’s release on UofM inflation expectations moved higher, with one-year 3.2% and 5-10 year 2.7%.–Fifty years ago, the Temptations released Ball of Confusion. Lyrics could have been from today. “Cities aflame in the summertime…” By the way, inflation in 1970 was 6.2%. And the band played on…
–Public transportation to and from the city has apparently been stopped. The building which houses the main office has been closed due to rioting. Therefore, service by the 24-hour desk may be curtailed.
In: Eurodollar Options
Judgments of Value
May 31, 2020 – Weekly comment
Below are excerpts of a speech given by Alan Greenspan at Jackson Hole on August 27, 1999, ‘New Challenges for Monetary Policy’
On such judgments of value rest much of our economic system. Doubtless, valuations are shaped in part, perhaps in large part, by the economic process itself. But history suggests that they also reflect waves of optimism and pessimism that can be touched off by seemingly small exogenous events.
We can readily describe this process, but, to date, economists have been unable to anticipate sharp reversals in confidence. Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect. 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.
Although many aspects of this issue deserve attention, let me cite a few open questions of particular importance. Efforts to differentiate between realized and unrealized gains, and the propensity to leverage both, may afford a deeper understanding of the consequences of asset price change. And differentiating between gains that arise from enhanced profitability and those that reflect changes in discount factors may also be useful. The former may be more likely to be sustained, given the tendencies of discount factors to revert back to historic norms.
There are important–but extremely difficult–questions surrounding the behavior of asset prices and the implications of this behavior for the decisions of households and businesses.
In August of 1999, Greenspan gave a speech at Jackson Hole, ‘New Challenges for Monetary Policy’. In it (linked below) he touched on new technologies and accounting practices, values for assets and their importance for the economy in general, and waves of confidence. Although Greenspan’s reputation has lost its luster in recent years, there is no denying this speech was prescient. On Aug 27, 1999, Nasdaq closed 2402. At the end of the year it was 3684. Having sailed through Y2K worries, by March 2000 it topped at 4816, astonishingly almost an exact double from the Jackson Hole speech. From there things went sour…but it took some time. At the end of May Nasdaq was 3180. At the end of 2000, it was just under the level when Greenspan delivered his comments, at 2341. The one year decline from the late March 2000 high to the early April 2001 low of 1348 was 72%. And it still wasn’t over. [chart below]
In 2000, the initial move in NDX from the March high to May low was a decline of just under 40%. By September, it had retraced just over the 61.8% level, and then a consistent sell-off ensued. In the current episode, the upside run to February’s high wasn’t nearly as dramatic. The initial leg down from the Feb high to March low was just 30%, also more shallow than 2000. However, the rebound has been quite fierce; as of Friday the index is testing February’s highs. This has been achieved with enormous support from the Federal Gov’t and the Fed itself. “Given the tendencies of discount factors to revert back to historic norms…” we might question the durability of the rally. However, the Fed is going to great lengths to assure the market that it won’t ALLOW rates to get back to historic norms. That point was especially driven home during the last attempt at ‘normalization’ which resulted in the stock market tantrum of Q4 2018. It’s no longer the judgments of millions of investors, it’s the injection of trillions in stimulus.
*****
I filled up in Wisconsin for $1.87 this weekend. I have a few friends, Lenny chief among them, that announce their cheap gasoline purchases like a badge of honor, as if they’ve rigged the pump price themselves. Well, I’m joining your ranks, comrades.
Once in a while an analyst remarks that it’s ambiguous now as to whether cheaper oil prices are good for the US economy, because while it helps Lenny and me, it hurts producers, and as we all know, the US is the top producer. According to the US Energy Info site, the US produces 19% of the world’s oil and consumes 20%. Maybe we should just call it a wash. You don’t hear much about the ambiguity of net positive or negative effects from other factors. Specifically, I am referring to financial conditions. According to former NY Fed chief Dudley, financial conditions consist of short term interest rates, long term interest rates, the level of stocks, credit spreads and the dollar. Clarida glowingly outlined easier conditions in a speech last week.
Is it clearly the case that the net economic effect of easier financial conditions is beneficial? Some officials are starting to address that question. For example, with respect to short term rates, Powell again said on Friday that negative rates will not work for the US economy. [There’s such a thing as too much rate cutting?] Many commentators have said that low long term rates help borrowers and home-builders, but also hurt savers and retirees that depend on interest income. The shape of the curve is another feature that can negatively impact the transmission of monetary policy if too flat or inverted. In terms of stocks, it’s great when they rise, but if not underpinned by profitability and innovation, instability can ensue. When credit spreads don’t reflect the reality of lending based on economic fundamentals, zombies arise. With respect to the dollar, the former mantra by treasury secretaries was that a strong and stable dollar is in the best interest of the US. Now, the world yearns for a weaker USD. Everything has become murkier. The thought extends to unemployment benefits where workers are making more from staying out of work than returning.
Another topic that seems to have fallen out of fashion is ‘equilibrium’. It used to be that economists talked about the market finding a new equilibrium when a shock occurred. In fact, I don’t hear the word much anymore. A google trends search for ‘economic equilibrium’ shows modest annual spikes in February, apparently coinciding with the initial leg of the semi-annual Humphrey-Hawkins testimony. Just another anachronistic footnote of what used to be the capitalistic system.
I’ll end with a note regarding Loretta Mester’s appearance on BBG on Friday. The interviewer asked her, regarding yield curve control, would she think about it as “focused on the front end to the belly of the treasury curve, or would you think about doing what Japan is doing, which is all the way out to ten years?” Mester responded that, while it’s not under serious consideration for this phase, her view is that it would be a support for forward guidance. She added that “right now the yield curve is very flat at the short end…maybe it’s not necessary to emphasize that forward guidance.” And concluded, “If we were to use it, I would view it as reinforcement to forward guidance on the short end.”
It’s perhaps worth noting that the thirty year yield in Japan hit a new ytd high this week just over 50 bps. I’d further mention that the US spread between 5’s and 30’s reached a new high over 111 bps, not seen since mid-2017. Control of the short end may not hold the long end down.
Finally, circling back to consumer pessimism and optimism and forecasts for confidence, note that the final readings for U of M’s inflation expectations were released Friday, with the one-year at 3.2% up from the preliminary release of 3% and the 5-10 year was revised up to 2.7 from 2.6! This, in spite of yoy PCE Core prices coming out at just 1% yoy. Another thing Mester said in her interview was that when the Fed considers new tools, we have to think about how to implement them and about how to exit from them. My guess is that the Fed is going to be spending a lot more time in the near future wrangling with the latter rather than the former.
OTHER MARKET/TRADE THOUGHTS
There was a buyer last week of 75k EDM1/M2 spreads for 6-6.5. This calendar ended the week at 5.5, up 0.5 on the week. Further out the curve, THREE-month spreads are nearly the same level. For example, EDU3/EDZ3 settled 5.0 and EDH4/EDM4 settled 4.5. EDM3/EDM4 closed 16.5, exactly 3x higher than the nearer version. These spreads give the impression that either inflation will begin to press higher over time, or that the Fed will cede control to the market. EDH’24 settled at 9949.5, just 4.5 bps lower than the lowest settle ever for the 16th quarterly, which was earlier in May.
I did a bit of review on spreads during the taper tantrum of 2013 which occurred in May. The second red, or ED6, went from around 9960 to 9920 from early May to end of June. (This period also encompassed a contract roll). The second green, ED10 went from 9940 to 9830, while the second blue, ED14 went from 9885 to 9740. Therefore, deferred contracts sold off harder. That period may or may not provide a good analogy for what is coming up in the US, but is worth noting.
Copper/gold ratio compared to the US ten year yield is one of Gundlach’s indicators. This week the former ratio ticked a bit higher while the ten year yield fell 1.5 bps. The divergence may not be enough to warrant a trade, but worth keeping an eye on.
| 5/22/2020 | 5/29/2020 | chg | ||
| UST 2Y | 16.6 | 15.6 | -1.0 | |
| UST 5Y | 33.3 | 30.0 | -3.3 | |
| UST 10Y | 65.9 | 64.4 | -1.5 | |
| UST 30Y | 137.0 | 140.5 | 3.5 | |
| GERM 2Y | -68.0 | -65.9 | 2.1 | |
| GERM 10Y | -48.7 | -44.7 | 4.0 | |
| JPN 30Y | 44.9 | 50.3 | 5.4 | |
| EURO$ M0/M1 | -11.3 | -10.8 | 0.5 | |
| EURO$ M1/M2 | 5.0 | 5.5 | 0.5 | |
| EUR | 108.98 | 111.04 | 2.06 | |
| CRUDE (active) | 33.25 | 35.49 | 2.24 | |
| SPX | 2955.45 | 3044.31 | 88.86 | 3.0% |
| VIX | 28.16 | 27.51 | -0.65 | |
https://www.newyorkfed.org/newsevents/speeches/2017/dud170330
https://www.federalreserve.gov/boarddocs/speeches/1999/19990827.htm
https://www.eia.gov/tools/faqs/faq.php?id=709&t=6
In: Eurodollar Options
Lowest inflation data of year?
May 29, 2020
–I saw a note yesterday that Orange Juice was one of the best performing commodities this year. July (JON0) sank below 100 in March and soared over 130 in May, closing at 127.80 yesterday. Of course, crude oil has had a much larger percentage run off its debacle low in April (and is arguably somewhat more important to the global economy). In any case, it seems that commodities are perking up; I’ve attached a chart of corn, which appears to have put in a May bottom and is poised for a move higher. (C Z0 was 4.04 in January, traded as low as 3.25 in May and is now 3.41, still shy of the 38% retracement at 3.55. Maybe I’m simply trying to wrangle arguments in support of a broader inflation theme, but I would also note that DXY (dollar index) closed below the 200 DMA yesterday and is further weakening this morning to levels not seen since late March (current 98.10).
–Rate markets were lethargic yesterday. However, 5/30 posted a new high 112.5 bps and 2/30 at 129.5 is just a couple off of the spike high in March. A friend noted that NY Fed’s Williams reference to Yield Curve Control would likely cover the curve out to the belly, leaving the longer end to seek higher yields, with additional supply of 20’s figuring into the mix. Also worth mention is that the ten year treasury to tip breakeven made a new short term high just over 119 bps, still below April’s high of 130, but well off the spike low of 60. For context, this spread traded between 150 and 180 from Q4 through January. Slight steepening of ED curve, with reds -0.375, greens -0.625, blues -1.125 and golds -2.25. Red/gold pack spread at 43.75 is well below March high print of 60.
–Equities slid from new highs into the end of the session as Trump announced a speech for today addressing China. Modestly lower this morning with small-cap Russell leading the decline. Not sure as to time of Trump’s news conference.
–This morning we’ll get the Fed’s preferred inflation measure, Core PCE prices for April, expected at yoy 1.1% from 1.7% last. Also, UofM final May readings on expected inflation. In the middle of the month, the prelim numbers were surprisingly high, 3.0% for 1 year and 2.6% for 5-10 years.
–Sad to see the violence engulfing Minneapolis and hoping that societal tensions don’t boil over to other metros. Hope Matt’s is still safe so I can get up there for a juicy lucy this summer.
–And no. I am not going lead off a post with Frozen Concentrated Orange Juice without a Trading Places clip. “Of course, gold doesn’t grow on trees like oranges.”
In: Eurodollar Options
Just skip to the bottom
May 28, 2020
–My opinion is that increased gov’t control saps economic dynamism. Continued efforts to bring Hong Kong into the ‘one country, one system’ umbrella were punctuated by Pompeo’s declaration that HK has lost its autonomy, which will surely have negative economic consequences. I think the same is true in the monetary realm, but the Fed trotted out NY’s Williams to say yield curve control is being seriously considered. “Yield curve control, which has now been used in a few other countries, is, I think, a tool that could complement, potentially complement, forward guidance and our other policy actions” said Willaims. Treasury vol has already been smothered in the past couple of weeks and held firm at low levels yesterday. Euro$ vol edged lower. As examples, on Friday 0EU 9975 straddle settled 14.5, down to 12.5 yesterday. 2EU 9975^ went from 18.5 to 17.5. YCC goes in the same basket with negative rates. Bad idea. Rather than ‘creative destruction’ it leads to ‘uncreative status quo’. The US thrives on economic change and growth. Now it’s threatened by COVID and another potential outbreak, this one being social unrest sparked by the death of George Floyd while being restrained by Minneapolis police. That city is now seeing violent protests which seem to be spreading to other metro areas, possibly exacerbated by the tinderbox of lockdown stress. I know it’s a poor analogy, but I just don’t think it’s a good idea to lock down rates at a time of extraordinary fiscal stimulus. By the way, Japan authorized $1.1 trillion in new stimulus.
–Back to the markets… Beige book was unsurprisingly downbeat. Today brings Durable Goods Orders, 2nd revision to Q1 GDP expected -4.8%, and Jobless Claims expected at another 2 million. Treasury auctions 7’s which were 53 bps yesterday. Net changes in rates were modest, eurodollar curve from +1.5 to -1.5 on the day. Thirty-year made a push for higher yield early, but came back to end nearly unch’d at 1.431%. 5/30 is knocking on the door for new highs at 1.088. One large trade supporting the steepener theme was a buyer of 75k EDM21/EDM22 one-year calendar for 6-6.5. Settled 6.5; open interest in the two contracts rose 59k and 53k. EDH21/EDH22, the one-year spread just before the one bought settled at 1.0, so there’s a small negative roll.
Great story to restore a little faith:
https://www.espn.com/espn/story/_/id/29195851/from-homeless-refugee-chess-prodigy-9-year-old-dreams-becoming-youngest-grandmaster
| From homeless refugee to chess prodigy, 9-year-old dreams of becoming youngest grandmasterIT’S 9 P.M., and 8-year-old Tani Adewumi is wired, like he’d just swallowed a bag of sugar. He had played chess all day, but he wanted to play more, at least until midnight. The first day of the …www.espn.com |
It appeared to be a blunder, but Tani knew exactly what he was doing. He remembered studying a 19th-century chess game played by the legendary Paul Morphy, and he knew if he could bait his opponent into taking his bishop, he could win the game.
Here’s a kid studying chess games from the 1850s, while the rest of the world repeats the same errors!
In: Eurodollar Options
Fixed it
May 26, 2020
–ESM at a new high for the move this morning above 3000, and just 450 away from all-time highs set in Feb. Mini-Nasdaq is up 176 at 9582; just one more day with this magnitude gain will eclipse the high settle in Feb of 9754.25. Everything is back to normal! Why, the Chicago Tribune even ran a story (nearly pushing Covid off the page) with this headline: ‘By Monday morning, 9 people had been shot and killed in Chicago, making it the deadliest Memorial Day weekend since 2015’. Ahhhh, normalcy.
–Bonds are down, but still in their two-month range. For example WNM (June ultra bond) currently trades 220, with a triple bottom low around 217-16. Friday was quiet with a slight bias toward flattening which has been erased this morning with front contracts -1 and blues (4th year) -4. The wall of liquidity upon which the stocks are surfing would ordinarily spell trouble for bonds, but the Fed is still there, providing a not-too-subtle backstop. If bonds do break recent lows, then I think vol will rise with higher rates, especially given current levels. Not sure of timing, but tempted to consider put ratios, long more of the lower strikes.
–Gold is down $13 but silver is up $0.13, pushing gold/silver ratio to a new recent low of 99.5, lowest since March, prior to the pandemic surge to 124.
–News today includes Chicago Fed National Activity and New Home Sales for April, expected to be down 23%.
In: Eurodollar Options
The Road to Recovery
May 24, 2020 – Weekly comment
Last week we had Maria Bartiromo’s morning show streaming, and her guest was gushing that he had his best month ever. He had something to do with RVs (recreational vehicles); the company might have been RVshare.com, an Airbnb for RVs.
Of course! Can’t fly. Have time off. Shelter at home. Just drive the (motor) home across the country!
Yes. That, my friends, is a picture of the Thor Motor Coach Tuscany, which you can pick up for about $300k. And, gas is cheap. Looks comfortable enough, but I’d rather fly. According to RVshare, prices are $160 to $250 per day. Of course, Chicago is relatively close to the RV capital of the world, Elkhart, Indiana, so maybe prices are slightly less expensive from this location. It would be great if they made a movie with the RV storyline. Oh, they already did. ‘Lost in America’ from 1985. Albert Brooks is passed up for a promotion as an advertising executive and convinces his wife to sell everything and travel the country in a Winnebago.
Since we’re on the subject, way back in the old CME floor days, a friend of mine rented a RV, hired a couple of strippers and a driver, and transported his clients from Chicago to the Indy 500. I really don’t condone that sort of thing. I’d rather see the Kentucky Derby. But if I said, at the time, that I didn’t harbor just a twinge of jealously mixed with admiration, I’d be lying.
Anyway, back into the world of prices and interest rates. The Fed’s Vice Chair Richard Clarida gave a speech last week outlining the Fed’s actions which led to a significant easing of financial conditions, “…buying some time until the economy can begin to recover, growth resumes, and unemployment begins to fall.” He said that his “projection is for the COVID19 contagion shock to be disinflationary, not inflationary…” both in the near and medium term. Forward guidance. He adds, when “we are confident the economy is solidly on the road to recovery, we will wind down these lending facilities at such time as we determine the circumstances we confront are no longer unusual or exigent.” Right. We all know how smooth the path to ‘normalization’ is after the drug-fueled liquidity surge. Here’s a chart which indicates the remarkable job the Fed has done, helped by low energy prices.
Why it’s Winnebago! It ended Friday above $58, having nearly completely recouped the 75% covid drop. Low finance rates. Cheap gas. It took over a year to recover from the late 2018 sell off. The same magnitude rally in two months. Breathtaking.
Perhaps the RV story is an appropriate parable of the US turning inward. This was a week that China made moves to further stifle Hong Kong’s autonomy, with Trump warning the US would respond “very strongly”. In my opinion, control measures by China will inexorably move from HK to Taiwan. However, the US is curtailing its globalist instincts.
At the same time, the Fed is expanding its control measures as well, in the realm of financial markets. Why should there be hedging of rates and risks? Perhaps that’s why CME (-1.2%) and ICE (+0.3%) were flattish on a week where SPX rallied 3.2%.
Eurodollar futures from EDM’20 to EDH’23, the next three years, are 20.5 to 36 bps, 99.795 to 99.64. The two-year yield ended at 16.6 and the five-yr at 33.3 bps. Biggest mover on the week was the long bond which rose 5.6 to 1.37%. 5/30 closed at 103.7, up 3 on the week, while 2/10 was barely changed at 49.3. The upcoming week is somewhat light on economic data. On Friday we’ll get PCE Core prices, expected 1.1% year-over-year. U of M final 1-yr and 5-10yr inflation numbers for May are also released; the initial readings were +3.0% and +2.6%. Much different from Clarida’s expectations.
Below is a nice visual of the Fed’s handiwork in terms of easing financial conditions. TY vol has plunged from a high over 13 in March to 3.8 on Friday. I guess we’ll call it ‘reversion to mean’. 3-month libor has settled around 37 bps, having been as high as 145 in March.
OTHER MARKET/TRADE THOUGHTS
Week over week change in EDU1 was -1.5 from 9981 to 9979.5 (this is still the high point on the curve). EDU3 was -3.5 from 9959.5 to 9956.0. Miniscule changes but the bias towards a steeper curve from rather flat levels remains.
It’s interesting to compare spreads in dollars, euribor and short sterling. Here are M0/M1, M1/M2 and M2/M3 in $, € and £. Dollars -11.25, +5.0 and +14.5. Euribor -10.0, +1.0 and +5.5. Sterling -11.0, +3.5 and +7.0. All are equally negative in the front end of the curve, but the US diverges to somewhat higher deferred spreads, which I loosely perceive as an expectation the US will emerge from the virus slowdown somewhat more quickly.
| 5/15/2020 | 5/22/2020 | chg | ||
| UST 2Y | 14.7 | 16.6 | 1.9 | |
| UST 5Y | 30.7 | 33.3 | 2.6 | |
| UST 10Y | 63.8 | 65.9 | 2.1 | |
| UST 30Y | 131.4 | 137.0 | 5.6 | |
| GERM 2Y | -72.8 | -68.0 | 4.8 | |
| GERM 10Y | -53.1 | -48.7 | 4.4 | |
| JPN 30Y | 47.3 | 44.9 | -2.4 | |
| EURO$ M0/M1 | -13.0 | -11.3 | 1.8 | |
| EURO$ M1/M2 | 3.5 | 5.0 | 1.5 | |
| EUR | 108.17 | 108.98 | 0.81 | |
| CRUDE (active) | 29.52 | 33.25 | 3.73 | |
| SPX | 2863.70 | 2955.45 | 91.75 | 3.2% |
| VIX | 31.89 | 28.16 | -3.73 | |
In: Eurodollar Options
Hong Kong autonomy dissolved. Illinois next
May 22, 2020
–The Hang Seng index fell 5.5% as China smothers Hong Kong’s autonomy. Shanghai Comp down 1.9% as well with China deciding to forgo forward guidance related to growth targets. By contrast Kospi down 1.4% and Nikkei down less than 1%. Treasuries are seeing a bid on the day of June option expiration. TYM 139.25c settled 4 vs 139-02 and are now at breakeven with TYM trading 139-10. Last week’s high in the contract was 139-21. Ten year yield now just below 64 bps and the new 20yr is just under 111 bps, 11 below the auction yield.
–In yesterday’s note I mentioned that on Wednesday, TYN 139^ settled 1’30, just above 4% vol and said: “If we’re at the same futures level (TYU0 138-25) the straddle would be 1’22 on Tuesday at the same vol.” Well, it didn’t take long to evaporate holiday weekend time value: TYU0 settled unch’d at 138-25 and the 139^ settled 1’20 which I mark at just 3.9. Of course, with new dynamics concerning HK, treasury vol will likely find its footing.
–Yesterday the Fed’s Clarida made a speech where he highlighted the easing of financial conditions. “…we have deployed our entire toolkit…” Hmmm, does that mean it’s EMPTY now? He also emphasized that the Fed is a ‘lender’ and cannot ‘spend’, which is in the domain of Congress. “The Fed can only make loans to solvent entities with the expectation the loans will be paid back.” Not so fast Illinois. An article in the Bond Buyer reports that Illinois is “…expected to include a debt authorization allowing the state to access the Fed’s Municipal Liquidity Facility for up to $4.5 billion.” * Fed lending officer reviewing the Illinois application under his green shade as Gov Pritzker shuffles his feet on the other side of a vast mahogany desk. “I see that you’d like to borrow $4.5 billion from the Fed. However, your credit score barely registers a pulse and your unpaid bills have piled up to $14.3 billion according to your Comptroller’s report. We see that you have issued bonds previously to chip away at unpaid bills, yet they’ve continued to grow, causing your outstanding bonds to trade at junk levels. You’re technically insolvent, I am afraid I am going to have to reject this application. *Reaches for the red ink pad and rubber stamp.*
In: Eurodollar Options
FB worth more than JPM+BAC+WFC+GS
May 21, 2020
–For the past month ESM has been in a clearly defined range of 2755 to 2965. Yesterday the high was 2975, indicating the possibility of an upside breakout. However, a few Trump tweets targeting China were enough to push the market back into lockdown range this morning (now 2950). Buyers of yesterday’s 20-yr auction were aided and abetted by Trump’s evening escalation. Nice buys! …in front of the scheduled Fed purchases today of longer dated issues ($3b 7s to 20s and $2b 20s to 30s). The auction yield was 1.22, with a yield late yesterday of 1.18 and this morning at 1.155 (I’ve instructed the desk to unload our auction buys just before Lorie Logan steps in).
–Fed minutes unsurprisingly discussed more specific forward guidance. Yesterday EDM0 ended at 99.71, the highest settle for the front quarterly of the move. Futures are indicating a further drop in libor; previous sales of EDM0 9962.5 straddles from 10 to 8.5 are seeing the calls paritize…now 8.5 in the money. Overall volume continues to be light, with little official news scheduled until after the holiday. TYN 139 straddle settled just above 4% vol at 1’30. If we’re at the same futures level (TYU 138-25) the straddle would be 1’22 on Tuesday at the same vol.
–FB hit a new all-time high with market cap $655B. Chart below is from Holger Zschaepitz (taken from twitter) showing that total market cap of this Magnificent 7, AAPL, AMZN, FB, GOOGL, MSFT, NFLX, NVDA has soared to a new high over $6 trillion. That’s in comparison to an economy producing $21.5 T, no make that $19.3 T. No make that $17 T… well, who knows what this year’s GDP will be, but certainly lower. By contrast, top 7 financials, JPM, BAC, WFC, C, GS, MS, USB total $851.7 billion. In other words, FB is getting close to entire banking industry. Makes me a little queasy.
–DISCLAIMER for the COMPLIANCE dept. The “instructing the desk” line is intended to be sarcasm. A joke. Lorie Logan runs the NY Fed desk and is a close personal friend of mine. I don’t think GDP is going to be as low as $17 trillion this year. That too, was a joke. I think.
In: Eurodollar Options
20 year auction: $20 billion
May 20, 2020
–May 20, 2020 and the treasury is auctioning $20 billion of 20 year bonds. W/I was 1.22 late yesterday. Also today Fed minutes from the April meeting will be released.
–Yesterday’s QE operation was the largest of the week, a purchase of $9.5 billion of maturities under 2.5 years. Tomorrow the Fed buys 4.5b of 4.5 to 7 year and 1.5b in tips and on Thursday $2b 20-30 year and $3b 7 to 20. So effectively the Fed is taking about one fourth of the 20 year with Thursday’s buys.
–Not much of interest yesterday aside from a late stock sell off. This morning ESM has completely erased yesterday’s swoon, trading +30 at 2948.75 and climbing, essentially back at Friday’s closing level. Implieds remain subdued in rates. June treasury options expire Friday with TYM 138.75^ settling 29 yesterday. Euro$ curve took back a smidgen of Monday’s steepener with reds +1.625, greens +2.375, blues +3.75 and golds +4.0. Volume has fallen significantly. CME and ICE shares both fell over 3% yesterday while SPX was -1.6%.
–Silver has continued to skyrocket, with the July contract up nearly 20% from $15 to $18 oz in the past 11 sessions.
–In front of the Fed minutes there are now NO Fed Fund futures above 100. The market seems to be taking the Fed at its word that it’s not going that route. Perhaps the minutes will reinforce the message.
In: Eurodollar Options
