Kinky Curve

January 22, 2021

–A few new highs yesterday:  Ten year treasury to inflation-indexed note breakeven to 218.5.  There are a lot of data points that can’t quite seem to surpass highs from the middle of 2018, but this spread has equaled the highs of that year (10 yr inflation proxy).  5/30 treasury sprd new high at 143 bps.  Interestingly, 5/30 was at a new LOW in mid-2018 at just 21 bps.  Today’s level is the highest since Trump’s election in 2016 when it reached 140.

–Green/blue euro$ pack spread (3rd year forward to 4th year forward) has been an outperformer, settling at 38.25.  This is the highest since 2015 (chart attached).  Strength here is due to several factors: 1) general steepening 2) Fed guidance of no hikes for three years 3) the libor extension announcement until June 2023.  EDM3/EDU3 spread on its own is 16.5; it had been 5 in late November just prior to the announcement.  From BBG, “ICE Benchmark Admin’s latest consultation concludes Jan 25, and some strategists have speculated an announcement on when the spread [SOFR/libor] will be fixed – and thus apply to the new secured overnight financing rate benchmark – may come as soon as next week.  This spread will be the pricing gauge for euro$ futures after June 2023.”  Such an announcement could cause further steepening of grn/blue.

–The red/green (2nd to 3rd year) spread is just 23 bps, while blue/gold (4th to 5th) is 34, so green/blue is obviously where the meat is.  Consider that the 2/10 treasury spread closed 98.4, and red/gold euro$ pack spread at 95.25, essentially equal.  So this one-year kink in the curve is worth about 40% of the steepness in 2/10…

–In a more general comment about the curve and inflation dynamic, here’s a tweet from Michael Ashton, @inflationguy : “I know that money doesn’t matter (tongue in cheek), but last week M2 rose almost $400mm, to bring the 52-week rise to 27.1%.  Now, volatility around year-end is normal but…no sign the Fed is slowing.”

–There’s a lot of coverage concerning bitcoin’s 20% + fall from grace over the past 5 sessions (more like 33% from absolute high to this morning’s low).  Bitcoin has been a poster child for rampant speculation, even though the recent entrance of new institutional players has now provided the cover of legitimacy.  Nasdaq’s seeing a bit of profit taking this morning after new highs, could some of the speculative froth be skimmed away here as well?

Posted on January 22, 2021 at 5:36 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Playing the lottery

January 21, 2021

–Equities surged to new highs on Biden’s inauguration, but fixed income maintains an underlying bid.  Tens essentially unchanged at 1.09%.  Eurodollar curve out to five years unch’d to -1.  However, even though overall action was muted, EDH1/EDH2 one-year eurodollar calendar settled at a new recent low of -0.5 due to a seller of about 40k (9981.0/9981.5).  This is the only inverted one-year calendar on the strip, and hasn’t been negative since late September.  Forward one-year spreads are increasingly positive as ‘normalization’ is expected.  EDH2/EDH3 settled 10.5 and EDH3/EDH4 at 39.0.  These forward spreads give an indication of when the market thinks the Fed will actually be tightening, though there have been a smattering of option put spread trades on 2022 and early 2023 contracts just in case the timetable is moved up.
–ECB today.  Stocks continue to levitate this morning, though the Russell is slightly underwater as of this writing.
–Implied vol in treasuries remains blanketed.  With 30 days until expiration TYH 137 straddle settled 58/64’s just 2.9%.  Feb options expire tomorrow with the contract hugging the 137  strike (136-31 settle).  Peak open interest in Feb TY puts is at the 137 strike with 149k open.  Those puts settled 8; longs have little chance left to monetize them and shorts have every incentive to defend their position by supporting the contract.  Asset manager buying of OTM April puts should commence today or next week as Feb expires; something like TYJ 130 puts for 1 (settled 2 yesterday).
–In the administration’s first new initiative for wealth redistribution, the mega-millions lottery is up to $970 million for tomorrow’s draw.  It’s not as if a payout like that comes with the same satisfaction associated with the hard work of buying out of the money calls on the next soaring microcap, but it’s a start.

Posted on January 21, 2021 at 5:02 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Hump day

January 20, 2021

–Inauguration day.  Treasury auctions 20y bonds.  Fed’s purchases tomorrow consist of $3.625 billion in 7 to 20 yrs.

–Although Mnuchin, with input from TBAC, ultimately dismissed the idea of issuing long dated bonds, former Treasury Sec’y Robert Rubin last week suggested locking in long-term borrowing costs with long dated issuance, and Yellen said in yesterday’s testimony she would be glad to study the idea.  No discernable market impact as tens closed at 109.2 and the thirty-yr bond fell 1.3 bps to 1.84%. 

–Yesterday’s flow in dollars mostly consisted of buying low delta put spreads, the largest of which was 40k 2EU 9937/9925/9912/9900 put condor for 2.5 vs various futures levels.  Settled 2.25 vs EDU23 at 9948.5.  Also a couple of long dated red put spreads, +20k EDH2 9975/9962ps for 1.75 and +15k EDM2 9975/9962ps for 2.5. 

–Feb treasury options expire Friday.  TYG 137 straddle settled 22 vs 136-30.  TYH ^ settled at exactly 1’00 with 31 dte.  There had not been much migration into April options, but it started to trickle in yesterday with TYJ put open interest adding 35k bringing the total to 78k.  April call open interest is just 17k.  

–NY Fed business leaders survey (regional) out yesterday, showing a wide disparity between worsening current conditions and expected future improvement.  A couple of interesting quotes regarding prices: “Employment levels declined at a faster clip though wage increases picked up.   Both input prices and selling prices increased at a faster pace than December.”

Posted on January 20, 2021 at 4:30 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Yellen sellin’

January 19, 2021

–Once again worth noting the large seller of EDU’23 9950 calls which has smothered back month eurodollar vol and spilled slightly over into treasuries.  On Friday another 40k were sold at 17.5, bringing the total to ~115k.  Settled 18.0 vs 9947.5.  Yesterday’s holiday activity appeared muted.  Tens ended Friday at 1.095% ref TYH1 136-275.  Futures currently 136-23 with stock index futures rallying into the start of earnings season.

–Today Yellen appears before the Senate to sell the new administration’s stimulus package.  From the relatively friendly seat at the Fed to a more charged environment.  The challenges will become greater in Q2 as official inflation figures are expected to firm significantly due to baseline effects.  Price increases across commodity markets are plainly visible.  The FT is leading with this headline: “Tripling of China-Europe shipping costs threatens goods supply”.  On the other hand, Lacy Hunt’s Hoisington Review maintains a bullish stance on treasuries. “When debt capital, like any other factor of production, is overused its marginal revenue product declines.  This serves as a persistent drag on economic activity that restrains growth despite the best efforts of monetary and fiscal policy.”  In previous missives he cautioned that overt Fed monetization of huge federal deficits would cause him to re-evaluate his call for ever lower yields.  That warning was absent this time. 

–Is inflation dependent on growth?  I think not. It’s more of a sentiment change: Hoarding, (and paying more) to ensure supplies that were previously taken for granted.  The last link in the supply chain has seen prices compress as displaced workers were forced into the food and consumer goods delivery gig by Covid.  The links in front of final delivery are likely getting stickier.  We’re moving into a different regulatory environment, and, (I’ll provide the warning that Hunt omitted) a central bank that has abandoned inflation concerns and elevated labor disparity as a top policy objective, while monetizing debt.  

Posted on January 19, 2021 at 5:15 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Russell vs SPX

January 18, 2021

–As noted previously, NFIB small business optimism seems to be correlated with Russell 2000 small cap index.  When Trump was elected, the combination of less regulation and lower taxes sparked a surge in NFIB, and Russell soon followed.  The two are diverging currently, with small business optimism plunging in the last report to 95.9, a level which is below the average of the index dating back to 1973, and Russell soaring to new highs, having more than doubled off the March low.   

From the report:

“This month’s drop in small business optimism is historically very large and most of the decline was due to the outlook of sales and business conditions in 2021. …Small businesses are concerned about potential new economic policy in the new administration and the increased spread of Covid-19 that is causing renewed government mandated business closures across the nation.”

–While it’s tough to short any index future in the face of massive monetary and fiscal stimulus, the attached chart of the ratio of RTY to SPX indicates that upside resistance is getting closer (shaded area).  As of Friday the value of one March Mini-Russell was $106,040 and of one ESH was $188,112.


Posted on January 18, 2021 at 6:31 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Global Walls

January 17, 2021 – weekly comment

“The treasury market’s bears had better take notice;  There’s a wall of global cash poised to swoop in and buy, likely limiting the upside in yields.”

So begins a BBG article from this weekend by Liz Capo McCormick et al, who I respect as a journalist, but I think this piece widely misses the mark. The article cites a couple of asset managers who allow that yields of 1.25 to 1.3% on the ten year may draw buyers, and then falls back on Japan as this supposed “wall of cash”.  From a short term perspective I agree that yields have run into resistance, and will likely drift sideways to lower this week.  The chart below clearly shows resistance defined by an obvious upward channel.  But the fact remains that there is a wall of supply on the way in the form of (continued) monster deficits.  At the same time, inflationary signals continue to percolate across markets and the dollar remains vulnerable. 

What about domestic buyers?  With Fed officials leaving little doubt that rates are on hold, the carry is quite attractive.  On top of that, Brainard, Clarida and Powell took pains to squelch any taper talk.  From the Chairman:

The economy is far from our goals, and as I’ve mentioned a couple times, we’re strongly committed to our framework and to using our monetary policy tools until the job is well and truly done. The taper tantrum highlights the real sensitivity that markets can have about the path of asset purchases. We know we need to be very careful in communicating about asset purchases… We will, of course, be very, very transparent as we get close. I would just say this on the current situation, when it does become appropriate for the committee to discuss specific dates – when we have clear evidence that we’re making progress toward our goals – and that we’re on track to make substantial further progress towards our goals – when that happens and we can see that clearly we’ll let the world know. We will communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual tapering of asset purchases. So, that’s how we’re thinking about that.

In my opinion the Fed may soon be thinking about how to gracefully ADD to purchases in order to stem yield increases.  There’s a lot of geopolitical uncertainty at this time along with constant coverage of virus outbreaks.  While I feel the corner has been turned on covid, what’s fairly clear about the Fed is that perceived risks are met with monetary accommodation.  The new framework makes it even easier for the Fed to default to ‘downside risks’ in making policy decisions.

I’ve personally been involved in trades where the thinking is “I’m probably ok from here.  How much farther can it possibly go?”  That is typically a very bad way to trade.  You’re already in it and trying to justify to yourself that a turn is near.  The answer is, FARTHER.  I’ve also had a client use the phrase, “The road to hell is paved with positive carry”.  What if, when Powell’s term ends in February of 2022, Biden nominates someone like Shaq?  The carry earned over the next year will be but a passing memory.

I’m just kidding of course (Shaq is 7’1”).  But I am not kidding about the new framework institutionalizing the risk bias toward higher long end rates due to concerns about the Fed’s desire for higher inflation.  U of M 1-yr inflation expectations popped up to 3.0% last week; 5-10 yr matched a five year high of 2.7%.

What follows are just a few charts that I’ve highlighted before that indicate to me that a bear market in bonds has commenced.   Yes, jobless claims jumped back up to 965k, highest since August.  Yes, it’s winter and no one wants to eat outside and all the holiday bar and restaurant parties were cancelled.  Retail sales slowed.  But pricing indicators seem to be gaining strength. 

The first chart is the ten year vs inflation-indexed tip breakeven with the 5y 5y frd inflation swap.  Both moving higher.  However, Ben Breitholtz from Arbor Research cautions that the 2yr to 10yr tips breakeven has inverted the most since July 2008.  He notes that “inflation expectations habitually peaked following inversions.”  I can’t seem to replicate his chart; I’m just taking it on faith.  The 5y breakeven is 214 to the ten year at 211, so slight inversion exists there.

The next chart is the BBG Ag index, strongly breaking out to the upside, with 2/10 treasury spread, ditto.
It’s reported this week that the largest owner of farmland is none other than Bill Gates at 242,000 acres.  Big tech versus real assets.  Food security is a huge theme and this guy is exploiting it.

Not pictured, but Gundlach’s copper/gold ratio versus tens seems to forecast outperformance of the former indicating catch-up by the latter.  Below is the BBG base metals index and the dollar index.  Both seem to be breaking out, though it’s a bit early to draw conclusions on this one.  Will be much clearer if 2018 extremes are surpassed.

This week includes the inauguration and a $24 billion twenty year auction on Wednesday.


On Friday the seller of EDU3 9950 calls continued his campaign, with another 40k sold at 17.5, bringing the cumulative total to at least 115k (total open interest in the strike is 129k).  These calls have 974 days until expiration.  On Friday, they settled 18.0 vs 9947.5 in the underlying; the 9950 straddle has been crushed, settling at 38.5 vs 42.5 the previous Friday ref 9942.0.  If the market were to immediately trade down 40 bps, all else being equal, the calls would be valued just under 10.  In three months, if futures remain here, all else equal, decay will provide a profit of 0.7 bps.  If futures roll forward as indicated by the EDH3/EDM3 calendar spread at 7.5, then the EDU3 calls will be worth 17.4 in three months.  (I am using March/June calendar rather than June’23/Sept’23 which is elevated at 15.5 due to the libor fallback timing).  I don’t really see the rationale for clobbering long dated calls at relatively low vols, but would consider something like buying 2EU 9937/9912ps which settled 5.25 if I thought a near term adjustment to higher rates was probable.

Though I think bonds are in a bear market, a corrective rally seems plausible.  From last week:

“I would be looking to buy call spreads in tens on weakness.  TYG 136.75/137.25 cs settled 10 vs 136-21; I would hope to pay 8 or less there.  Expiration is one week from Friday.”  Settled 13 vs 136-275.

Goldman has upped its 2021 GDP forecast to 6.6%.  US treasury bond vol remains compressed.  I believe USH has a bit of room to rally in the early part of the week, to somewhere just above 170, retracing a bit of the damage done by the Jan 6 Dem sweep in Georgia.  Look to buy USH put spreads on a rally.

UST 2Y13.513.50.0
UST 5Y48.245.3-2.9
UST 10Y111.5109.5-2.0
UST 30Y187.2185.2-2.0
GERM 2Y-70.1-72.0-1.9
GERM 10Y-51.9-54.3-2.4
JPN 30Y64.664.3-0.3
CHINA 10Y314.9314.8-0.1
EURO$ H1/H22.01.0-1.0
EURO$ H2/H315.010.5-4.5
EURO$ H3/H438.039.01.0
CRUDE (active)52.2652.420.16
Posted on January 17, 2021 at 12:10 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Long end weighed down by stimulus and price pressures

January 15, 2021

–Pressure on the long end continued Thursday with the 30y bond climbing 5.6 bps to 1.874% as Biden’s $1.9 trillion stimulus package was leaked.  Tens rose 4.1 bp to 1.129 with the two year unchanged.  5/30 spread notched a new high for the move at 139.  Powell was uneventful, saying that policymakers are going to be careful about communicating “well in advance” a reduction of bond buys (though treasuries slid after his comments).  Trades in euro$ continue to favor downside, for example another 100k 3EH 9887 put were bought for 1.5, with the underlying EDH4 settling 9928.  In terms of timing for a Fed hike, it’s somewhat interesting to look at the green pack (2023 contracts) relative to the blue pack (2024 contracts).  Yesterday greens closed +0.25 while blues were -1.25, the spread settled 38.875.  Red/green pack spread settled 24.  I personally think the Fed will be forced into a hike by the middle of next year as the upcoming inflation data that Powell vows to look past will spark market action that can’t be ignored.  Get ready for a bunch of “Is the Fed behind the curve?” articles over the next few months. 

–Today’s news includes PPI, Retail Sales and Industrial Production.  Equity option expiration and midcurve eurodollar option expiration. Ahead of Wednesday’s locked-down inauguration we will probably see some defensive buys in shorter treasuries.  

Posted on January 15, 2021 at 5:22 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Risk reversals

January 14, 2021

–Yields retraced a bit of the recent surge, with tens down 5 bps at 108.8.  The combination of a strong 30-yr auction and Brainard’s comments provided midday support into the close.  Key from Brainard: 

The economy is far away from our goals in terms of both employment and inflation, and even under an optimistic outlook, it will take time to achieve substantial further progress. Given my baseline outlook, I expect that the current pace of purchases will remain appropriate for quite some time.

The important voices have dismissed the idea of the Fed tapering buys.  Brainard, Clarida, and certainly Powell today.  One other important snippet from her speech indicates the Fed is prepared to look past upcoming higher inflation data:

Inflation may temporarily rise to or above 2 percent on a 12-month basis in a few months when the low March and April price readings from last year fall out of the 12-month calculation, but it will be important to see sustained improvement to meet our average inflation goal.

–Powell’s term as chair ends Feb, 2022.  Whether his term is extended or not, employment has been elevated to the prime mandate of the Fed. 

–Implied vol declined yesterday.  In dollars, the seller of EDU3 9950c added with 20k more at 16.5, bringing his total to 70k (settled 18.25 vs 9944.5).  Long dated straddles lost 2.5 to 3.5 bps.  Vol on the US contract slipped to a recent low as the cash bond yield retraced 6.7 to 181.8.  USH 169 straddle settled 3’18 or 7.6 vs 169-12.  One bond (USH1) point is worth about 4.75 bps.  Given recent strength in grains, copper, oil, etc, bond vol seems quite low, even if the Fed is willing to look past price hikes.  BBG noted a new high in the 5y 5y inflation forward in Europe.  And of course there are pockets of rampant speculation in equities reminiscent of the late 1990’s.  See PLUG, GME, etc.  In dollars, the hedge against inflation is taking place through midcurve risk reversals.  Art Main of TJM summarizes: 

We also continued to see interest in downside via risk reversals in midcurves as follows:

+10k 3EH1 99.00/99.625 risk reversal at 2.5 (+p -c) position add ~ 30k
+10k 3EM1 98.875/99.625 risk reversal at 5 (+p -c) position add ~ 32k

So this brings total positions across all structures to greater than 180k as we saw similar flows over the last two weeks via the following structures:
+40k 0EM1 99.25/100.25 risk reversal at 2.5 (+p -c)
+50k 2EH1 99.25/100.25 risk reversal covered 99.71/99.805 delta .05/.04 between 0.25 and 0.5 (+p -c) 
+30k 3EH1 98.875/99.625 risk reversal covered 99.305 delta .10 at 1 (+p -.c)

Posted on January 14, 2021 at 5:42 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

News of tapering is premature

January 13, 2021

–Early morning weakness in fixed income subsided after the ten year auction; yields ended only modestly higher.  Tens up 0.7 bp to 113.8.  2/10 squeaked to a slight new high of 99.3.  Eurodollars were flat to down 1 out to five years.  Today’s news includes CPI, expected +0.4 month/month with yoy Core 1.6% (last at 1.6).  Beige book released this afternoon in front of the Jan 27 FOMC.  Brainard speaks at 1:00pm on the economy, which could be an important event.  An article on BBG this morning notes: “In the past week, four of the Fed’s 18 policy makers have publicly raised the prospect they may discuss reducing bond buying – currently running at $120 billion a month – by year’s end.  In contrast, several others have called the debate premature and Fed VC Clarida, the most senior central banker to weigh in, has said he doesn’t expect any changes before 2022.”  So today Brainard, who will probably become the next Fed Chair, weighs in, followed by Powell tomorrow.  While Fed officials still lean towards a slight downward risk in inflation (according to Clarida), markets have taken a different view.  Since November, WTI is up 43% from around $37/bbl to $53.  Corn is up 33% over the same timeframe, from about $4 to this morning’s $5.32.  A story on ZH citing notes: “It has never been more expensive to get a container of goods across the ocean.” (The article is mostly about anomalies in LNG shipping).  And, in terms of asset price inflation: “The percentage of NYSE stocks above 200-day moving averages has surpassed 90% for the first time since 2009.  This rare event has happened only 5 times using weekly data going back to 1974.”  The dollar has had a small bounce which feels like its fading. 

–The BBG article cited above voices some concerns about a repeat of 2013’s “taper tantrum”, but I think a reduction in bond buying will have a more negative impact on stocks than bonds.  In any case, Brainard and Powell will defer the idea of tapering any time soon in the quest for official inflation readings above 2%.  By then, of course, it will be too late!

–Decent buying yesterday in TYG 137c which traded mostly 4 but settled 6 ref 136-125 with an open interest jump of 51k.  These were the most heavily traded TY call and expire on the 22nd, two days after the inauguration.   

Posted on January 13, 2021 at 5:06 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Yields march higher

January 12, 2021

–Interesting session Monday which featured continued steepening and a push to higher yields.  Tens rose 2.1 to 113.1.  Back month euro$ calendars have exploded over the past week as sentiment has shifted.  Red/gold euro$ pack spread (2nd yr forward vs 5th year forward) rose over 4.5 on Monday to 98.5, equaling 2/10 which closed 98.8 (+1.3).  Red/gold was 72 on Jan 4, so it’s up 26.5 in six sessions.  As another example, EDH3/EDH4 (green/blue March) settled yesterday at 41 from 28.5 on Jan 4.  There was particularly heavy trade once again in Blue March midcurve puts, with the standout being a buy of >100k 3EH 9887p for 2.5 (settled there vs 9924).  Taking advantage of this trade, there was a buyer of 20k 9912/9900/9887 put tree for 0 (settled 0: 6.5, 4.0, 2.5).  These trades give some sense of how the market has positioned:  the thought had been to keep premium outlays low by expressing a short, but selling extra downside puts, because after all, the market hasn’t shown true downside follow-through in years.  Now we see a reach to cap off open-ended downside risk, even as others dismiss the possibility.  

–What has contributed to the shift?  Biden is unveiling his multi-trillion stimulus package on Thursday, just as treasury attempts to auction $38b in tens today and $24b thirties tomorrow.  I suppose that can cause a ‘concession’.   TYH currently at a new low 136-07.

–This may or may not fall under the heading of speculative excess, but Jan bitcoin futures fell 5740 or 14% yesterday to 33780.  On the same topic, here’s a snippet from Jeremy Grantham’s piece: “…my personal favorite Tesla tidbit is that its market cap, now over $600 billion [yes he’s off by $200 billion, but that was DAYS ago] amounts to over $1.25 million per car sold each year versus $9000 per car for GM.”  Grantham minces no words and says it’s all a bubble. 

–In other news, the FBI is warning of general protests which may break out into something “mostly peaceful”.  A private collector of “decommissioned surplus military equipment” helpfully chose yesterday to have a tank delivered by being driven down the streets of Palmetto Bay, Florida.  I don’t mind tanks in the streets, just don’t cut off my social media feeds…  And the mayor of Washington is advising those planning to attend festivities associated with Biden’s inauguration to stay home.  All nine of them.  [too early?]

Posted on January 12, 2021 at 5:36 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options