NFP

August 7, 2020

–Unemployment Friday, expected to be an increase of 1.48 million vs the blockbuster 4.3 million in the last report.  Rate expected to decline to 10.5 from 11.1%.

–Not much to comment on in the rate world.  Tens fell 0.5 bp to 53.5.  Libor/OI proxy FFF1 vs EDZ0 settled 21 bps, lowest since early Feb.  Range from mid-April to late July was 25 to 30, but the Fed’s CB swap line extension at the July 29 FOMC caused immediate compression.

–August ED midcurves settle one week from today.  3EQ 9975 straddle settled 5.0 vs 9972.5 in EDU’23.  Amazingly enough, this contract hasn’t had a daily range greater than 5 bps since June.  Talk about being in quarantine.

–Precious metals continue a spirited run with spot gold above $2050.  People often say there’s no yield on gold, but Aug gold yesterday settled $2051.50 and Aug 2021 settled 2103.20.  Take delivery and store the physical for ~2.4% over a year.  Or, you could collect 11 bps on the US 2y note.

–Stocks a bit lower on Covid, TikTok, WeChat, Congressional stall.  Nasdaq has been higher 7 trading sessions in a row.  Morgan Stanley covered a dollar short citing oversold conditions; DXY seeing a bounce.

Interest doesn’t compound, problems do

August 6, 2020

–The Treasury refunding announcement caused a small pullback in bond prices along with modest curve steepening, but overall action was quiet.  Ten year yield rose nearly 3 to 54.1.  Once again, the ten year tip made a new ‘real’ low yield of negative 107.7 and is -109 this morning.  Gold and silver continue to respond with new highs.  The gold/silver ratio hit 124 this year, a record high.  Since then silver has outperformed and the ratio is now around 74.  When the precious metals made their previous highs in 2011 (silver > $48/oz), the silver gold ratio was just below 32.  The 61.8 retrace from 2011 low of 32 to this year’s high of 124 is 67, and the 50% is 78.  What does that mean?  Probably not worth looking for relative outperformance from here…go ahead and buy both!

–Payrolls report tomorrow and Jobless Claims today, but yesterday’s large miss on ADP with a huge positive revision for the previous month barely caused a ripple.

–Amusing tweet from Morgan Housel yesterday: “Teach your kids about compounding: put your money in a savings account and watch it double every 19,876 years.”  Funny, but not so funny to older folks looking for interest income who are now forced out the risk curve to silver.   A ZH article quoted an analyst on AAPL…”enterprise value up 90% over past 2 yrs despite no net income growth. 100% driven by multiple expansion… driven by Fed policy.  When the FF rate was 2.4% in 2019, AAPL had PE of 15x, Today AAPL PE is 32x.”  Of course, with FF now 10 bps one could say, “Why that makes AAPL cheap!”  A piece in BBG says super expensive apartments in Manhattan are going begging, citing a listing at $22k/mo.  The urban experience for the well-to-do has lost allure as crime rises, not only pressuring rents, but tax collections as well.  Illinois Gov Pritzker is warning of “extraordinarily painful” cuts in services if Washington doesn’t provide pension​  ​pandemic relief to states (after decades of promising greater pensions in exchange for votes).  Congress and the admin are not budging on the payment extension to households yet, but a good pullback in stocks will allow everyone to regain a bit of focus.

New high gold

August 5, 2020

–On a closing basis, Tuesday was lowest ever yield in tens which are hovering just above 50 bps even as Nasdaq holds near new highs.  On June 30, the ten-year inflation index note was -70.5.  Just over a month later 25 bps of ‘real yield’ has been shaved off, now at negative 105.2.  The euro$ curve continues to flatten.  Red/green pack spread at just 3.5, down 1.25 on the day. The low on Feb 21 was 1.5 but intervening high was over 26.  Red/gold closed down a whopping 6 bps at 30.625 (the low on Feb 21 was 16 and intervening high was 62).  2/10 treasury spread made a new low of 40 bps, down 4.7 on the day as twos yield 11 bps, just 1 bp above EFFR and SOFR. 

–Implied vol firmed ever so slightly in treasuries, but long dated euro$ straddles were crushed, with long greens compressing by 2 to 3 bps.  For example, on Monday, EDH23 9875^ settled 54.0.  With futures up 2 bps to 9980.5, that straddle settled 51.5.   The first 4 months of the year, from the start of Jan to end of April, EDH3 rallied from 9823 to 9961 or 138 bps.   With over 30 months until expiration, the straddle is just over half a percent.  

–A massive explosion rocked Beirut yesterday, probably part of another peaceful protest.  Whether intentional or accidental, gold responded, currently trading $2040 having finished Friday at $1975.  The dollar index had a brief pop to start August, but is again sliding this morning, with EUR 1.1850.  Nasdaq is, of course, edging to another new high this morning.

–News today includes the refunding announcement from Treasury, with ever increasing auction sizes being issued into record high bids of willing investors with the implicit, no, might as well say explicit, backstop of the Fed. ADP expected 1.2 million, and Service ISM 55.0.

I look at the world and I notice it’s turning
While my guitar gently weeps

Confidence

August 4, 2020

–Quiet Monday with yields edging slightly higher as Nasdaq made a new all-time high.  Ten year up 2.6 bps to 56.1.  The ten-year inflation indexed yield made a new low of negative 102.8 bps, bringing the ten-yr inflation breakeven to a new cycle high 159 bps.  ISM Mfg came in at 54.2, better than expected.

–Yesterday also featured the Fed’s Senior Loan Officer survey, which unsurprisingly revealed that banks have tightened lending standards on C&I loans, CRE (commercial real estate) and loans to consumers.  These tight standards are high relative to the midpoint since 2005, but not up to 2008/09 stringency, probably due to unprecedented support from the Fed.  Clearly the Fed and Treasury are supplanting the private market for borrowing and lending.  For example, there was a Bloomberg interview over the weekend with former Fed officials Simon Potter and Julia Coronado where they suggested direct digital transfers from the Fed to households (Recession Insurance Bonds) upon a given increase in unemployment.  These payments would occur instantly and directly and would avoid congressional wrangling, thereby “supporting spending and confidence.”  Current borrowing is being done for the sake of survival, not for growth.  To say that money sloshing out of the Fed inspires confidence seems a bit of a stretch, though it rightly provides a bridge for reaching the other side (whatever that might look like).

–One of the things I loved about the CME floor was the vast array of characters.  The euro$ area had hundreds of people so it would be impossible to know everyone.  There was an imposing front month euro$ local I had never interacted with; he was big both physically and as a trader, wavy sandy hair capping a jovial face, on a hulking body; probably played college ball.  He wore the standard issue red members jacket.  I could only surmise his keen wit and imagination by the fact that his membership acronym was his first name spelled backwards.  Anyway, I somehow got into a conversation with him, and he was disarmingly open and funny.  Told me that his sister saw how well he was doing in the financial markets and was trying to give him some of her nest egg so that he could invest it for her.  “Invest?!  That’s not what I do.  Here, do you want some money?  I am glad to give you some money.”  He was telling this story with a goofy grin, saying that his sister was really mad and frustrated with that response.  She didn’t just want a handout.  She wanted to buy into the financial wizardry embodied by her brother (who I would grant was likely quite sharp with arithmetic).  Like Robinhood traders.  Investment in innovative productive technologies is one of the core tenets of the modern economy.  There is risk involved.  Printing dollars and handing them out like confetti does not inspire economic confidence. 

–By the way, it might sound like I am making fun of this particular trader, and I am, sort of. But he probably made more money on many days than I made in a year (who’s got the keen wit now?). Anyway, that’s what made the floor amazing. 

That’s what you’re good at Butch

August 2, 2020 – Weekly comment

There’s a scene in Butch Cassidy and the Sundance Kid, where they’re cornered on a sheer cliff with lawmen closing in on all sides.  Butch (Paul Newman) looks over the rocky edge down to a rushing river far below and says, “We’ll jump!”  Sundance (Robert Redford) is tensely anticipating the shootout and says no, he’ll stay and fight.  Butch, knowing it’s the only chance out, says “What’s the matter with you?”   Sundance, in an embarrassed yell, “I can’t swim!”  At which point Butch breaks out in laughter and says, “Are you crazy? The FALL will probably kill ya!”

Mnuchin and Powell.  The former wants to shave back federal government stimulus to levels that don’t completely distort incentives for going back to work.  Powell has mentally taken the jump and will let the river carry him downstream, risking rapids and other dangers because he sees no way out. 

As of Friday, the $600/week federal payment program expired and has not yet been replaced.  Moratoriums on evictions are coming to an end.  Reuters cited a report from CompareCards that from mid-May to July, 25% of credit card holders had an account involuntarily closed and 33% had limits cut.  In a July 22 post, CompareCards.com author Matt Schulz noted that the average credit card rate on the most popular 200 cards in the country is 19.28%, up from 19.22%.  The St Louis Fed website cites a lower number for all cards, saying that in May the rate was 14.52%.  In either case, that’s a pretty juicy spread with funding rates near zero.  The only reason for banks to trim this exposure is because they perceive big problems.  I suppose it’s up to the Fed to buy paper backed by credit card receivables.  For Powell, it doesn’t matter where the flow comes from, the whole task is keeping this thing afloat.

The Reuters article also notes a decline in corporate credit ratings.  No surprise there.  Fitch announced Friday afternoon that it had revised the US outlook to negative.  And treasuries actually ticked HIGHER to the highest ever for a front TY contract, 140-04! 

On Wednesday the Fed extended the program of providing swap lines to foreign central banks, and Powell assured continued accommodation of everyone and everything. On Thursday Q2 GDP was reported at a record low -32.9%.  Eurodollar futures from the third quarterly back posted new all-time high settles this week, the peak being EDH’22 at 9985.5 or 14.5 bps.  SOFR ranged from 9 to 13 bps in July; the two-year note ended at 11 bps.  Aside from the 30y bond at 1.19%, all treasuries ended at new low yields.  Notably, the ten year inflation-indexed (real) yield ended at a new all-time low of negative 101 bps.  Gold closed at a new high of $1975/oz, while silver, though on a recent tear at $24.39, is still only half the price it hit in April of 2011.  And bitcoin, now around $11k is lagging its ath of $19500 at the end of 2017.

Though fiscal support is now somewhat endangered, the other record breaker is the amount of upcoming treasury issuance, details of which will be released on Wednesday, August 5.  Suffice it to say the auction calendar will be jam packed going forward.  If there was ever a time that government might “crowd out” other borrowers, it’s now.  Of course, the Fed’s balance sheet has exploded due to purchases of debt, good and bad, and though it has eased the past few weeks, it’s likely only the pause that refreshes before another sprint to the stratosphere. The Fed is going down the monetization rapids.

Data this week includes ISM reports and the Employment situation, with NFP expected up 1.5 million as people return to jobs. 

By the way, Butch and Sundance did try a stint at “going straight” in Bolivia, just like Powell did as he tried “normalizing” in 2018.  Eventually though, they went back to doing what they were good at, robbing banks.  It didn’t end well.

OTHER MARKET/ TRADE THOUGHTS

On the week 2/10 closed near a recent low at 42.6 and red/gold Eurodollar pack spread similarly closed on a new recent low just above 35 bps.  The range in the former has been 11.3 in February as stocks were making new highs, to 68.3 in March as stocks crashed.  The range in red/gold this year has been 16 in February to 62 in June.  If the Fed wants to refrain from being the buyer of last resort of bloated auctions, then it must keep some steepness in the curve so that domestic buyers are confident of riding positive carry. 

While reds to deferred on the Euro$ curve flattened to new recent lows, individual pack spreads remain successively steeper.  For example whites to reds (first to second year) closed negative 4.75, reds to greens (2^nd to 3^rd) at positive 5.125, greens to blues (3^rd to 4^th) at 12.5 and blues to golds (4^th to 5^th) at 17.5.  Whether due to perceived increased inflation further out, or a rebound in economic activity, or indigestion of longer dated supply, it’s somewhat comforting to note some steepness.

One final note, while still low, US straddles firmed into week end.  The classic 30 yr bond (US) features fairly tight option markets and better opportunities for movement than other parts of the curve.  Worth exploring.

	7/24/2020	7/31/2020	chg
UST 2Y	14.7	10.9	-3.8
UST 5Y	27.7	21.4	-6.3
UST 10Y	58.7	53.5	-5.2
UST 30Y	123.6	119.6	-4.0
GERM 2Y	-65.1	-71.3	-6.2
GERM 10Y	-44.8	-52.4	-7.6
JPN 30Y	57.1	52.5	-4.6
EURO$ U0/U1	-6.0	-7.0	-1.0
EURO$ U1/U2	3.0	2.0	-1.0
EURO$ U2/U3	11.5	10.0	-1.5
EUR	116.54	117.81	1.27
CRUDE (active)	41.29	40.27	-1.02
SPX	3215.63	3271.12	55.49	1.7%
VIX	25.84	24.46	-1.38

Tech giants soar with Q2 GDP -32.9%

July 31, 2020

–On a day when Q2 GDP showed a historic plunge of 32.9%, and Trump suggested the election be postponed, tech giants FB, AMZN, AAPL released better than expected earnings and soared in after hours trading.  At the same time, yields are making new lows with the two-yr just under 12 bps, and fives 22.6.  Tens ended at 53.8 with TYU 140-005s, the highest ever settle of a front TY contract. It’s a bit higher this morning at 140-03 even with NQU up over 100.  Red, green and blue euro$ contracts settled at highest levels ever, with EDU21 and EDH22 at peak levels of 9985 or 15 bps.  The ten year inflation-indexed note made a new low of negative 98.3 bps, so of course Dec gold made a new high this morning at 2005, and is currently 1993.8, up $27.  The dollar index is making new lows. The only thing that makes sense is that Russell futures are down slightly.  Otherwise it’s all a bit Ozzy.
–Over the month of July SOFR has been 9 to 13 bps, with the two year note yield currently right there. 
–Today’s news includes Personal Income and Spending, with Core PCE prices expected 1.0% yoy.  Also, final July one-yr and 5-10 year inflation expectations from UofM, which were 3.1 and 2.7 at the mid-month release.  

Powell vows to do what he can as GDP expected -35%

July 30, 2020

–Powell vowed continued support for the economy at yesterday’s FOMC.  Yields at the front end pressed lower with twos down to 12.3 bps, a decline of 1.2.  Tens were unch’d at 57.7 and thirties rose 2.3 to 1.244%, providing a small bounce in the curve.  Notable buying in EDZ0 as swap lines to central banks were extended…appears to be short covering as open interest fell in the contract.  EDZ0 closed +2 at 9972.5 (strongest contract on the strip), while FFF1/EDZ0 spread closed at a new low of 24.  (Proxy libor/ois).  

–New high in ten-year note to inflation-indexed yield breakeven spread at 153.4 bps, as the tip yield hit a new all-time low of negative 95.7 bps.  DXY made a new low yesterday as well with EUR popping above 1.18 for the first time since Q3 2018.  Current 1.1747.

–Today’s news includes Q2 GDP which is expected down around 35%.  Whether anticipating the shock of the actual number or concerned about this afternoon’s earnings, stock index futures have reversed yesterday’s gains.  After the close FB, Alphabet, AMZN, AAPL all report.  Newmont this morning.  Of course, lack of an agreement on extending the $600/week will also cut oxygen from stocks, and that deal doesn’t seem any closer today.  

FOMC day

July 29, 2020

–In front of today’s FOMC meeting the curve flattened with many spreads making new recent lows.  Ten year yield fell 2.5 bps to 58 bps, within a few bps of all time lows.  2/10 is at its recent low of 43.8, while the red/gold euro$ pack spread fell 2.125 to a new low (since March) of 35.625. Red/gold has a double top at 62 from the March spike and June surge.  Implied vol in rates continues to grind lower, even from these basement levels.

–Several articles suggest the Fed has to maintain extremely loose conditions.  For example, Reuters notes that S&P has made 1190 downgrades so far this year, just 136 shy of the 2009 total, with plenty of time left in the year to catch up.  

https://www.reuters.com/article/us-health-coronavirus-ratings-graphic/how-the-coronavirus-is-crushing-credit-ratings-idUSKCN24U18Y

How the coronavirus is crushing credit ratings – ReutersThe crippling effects of the coronavirus crisis have crushed government and corporate finances and sent debt soaring. As the charts below show, it is also crunching their credit ratings and …www.reuters.com

Another article notes that banks are cutting credit limits or simply closing credit card accounts.  According to CompareCards, from mid-May to July, 25% of cardholders had an account involuntarily closed and 33% had limits cut.  Evictions are also expected to rise as the moratorium on non-payment ends.  If Congress can’t agree on a large new package to replace the $600/week, then the Fed is going to have a much bigger job on its hands that it can’t possibly win.  If the curve gets any flatter it will only cause banks to draw in their horns, putting the Fed in the position of being a direct lender without an appropriate transmission architecture.  No matter what the Fed says, accommodative conditions will continue with massive growth in the balance sheet.  Gold has pulled back a couple of bucks to 1955, but bitcoin is still above 11k, and DXY is at a new low this morning.  

–Heads of FB, AMZN, AAPL and GOOGL appear before the circus known as Congress today, right before tomorrow’s earnings reports (after the bell)

Fed and Treasury. Buying and Selling

July 29, 2020

–Yields edged slightly higher yesterday with tens squeezing just above 60, up 1.8 to 60.5.  Implied vol remains blanketed, with TYU 139.5^ settling 56 or 3% vol.  Gold soared to a new high but silver outperformed.  Gold/silver ratio now 81.5, below the triple top of 82 in 2003, 84.5 in 2008 and 83.25 in 2016. 

–The NY Fed released a new purchase schedule, buying 12.8 billion of short term debt today 0-2.25 yrs, while the treasury auctions $44b of 7’s.  One might think that would result in a steepening trade, but the Fed will also be buying ~$5.5 billion in 30y MBS.  I am adding the links of schedules here, as they aren’t easy to immediately access on the NY Fed website.
https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details#current-schedule

https://www.newyorkfed.org/medialibrary/media/markets/ambs/AMBS-Schedule-072820.pdf

–As ZH summarizes, the Fed will buy approx $9 billion per day in treasuries and MBS for the next two weeks.  

–The administration also released its plan to replace the $600 week.  It is, of course, smaller.  It was, of course, derided by Democrats.  It will, of course, result in a last minute compromise when stocks force the issue.  

–FOMC tomorrow. 

–Chongqing hit by massive flooding. “HK’s Econ Times reports that by 6 am Monday morning the water level at the Cuntan hydrologic station in Chongqing rose to 180.5 meters, exceeding the warning level for the first time this year.”  Btw, Three Gorges is 185 meters.
https://www.taiwannews.com.tw/en/news/3975669

NOTE ON GOLD AND OPEN INTEREST

July 27, 2020

On June 29, I put out a tweet with a chart of the front Gold (GC) contract and aggregate open interest, suggesting that longs were blown out of the market in the global COVID-inspired margin call in March, and might have to chase the GC contract up to re-establish longs.  A friend (thanks Marco) suggested that I update the chart.  At the time (end of June) agg Open Int in GC was 546k contracts.  Currently aggregate OI is 607k contracts, which is still well below the high in the beginning of the year of 800k, EVEN THOUGH GOLD MADE NEW HISTORIC HIGHS TODAY.  I’m no expert on global flows of gold, but to me, this suggests that there’s plenty of upside room.  Below is the updated chart.

Two additional notes. 
First, there was an article on ZeroHedge that 5.5 million ounces of gold were delivered into the June Gold contract expiration.  Typically a negligible amount of physical is delivered.  The author suggests it’s because NY gold was trading at a premium to London, creating an arbitrage opportunity.  Clearly there is intense focus on gold as an investment theme currently, as any scan of financial press headlines will confirm. 

https://www.zerohedge.com/markets/record-170-tons-physical-gold-were-just-delivered-comex-heres-why

Second, and this one might be a bit of a stretch, I also created a shorter term chart with the front emini SP contract, ES1, and aggregate open interest.  What we see here is that open interest soared in March, as portfolio managers used the contract as a hedge against long stocks.  You can see that from the start of the year until early Feb, the contract didn’t register much of a demand for a hedge, as open interest was horizontal.  I overlaid VIX as well, but it essentially shows the same dynamic so I omitted in the interest of simplicity.  We want the hedge after it starts to move.  What I find a bit interesting here is that even with VIX at around 25, open int in June and July is also flat-lining at a slightly lower level than the start of the year.  It just seems as if the market is convinced the Fed has our backs and will continue to support the rally.  No use in taking any proactive safety measures.  De-fund the hedge.   

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.