March 16. Implied vol drop in treasuries suggests yield rise might have run its course
New highs in curve yesterday as two year note yield fell slightly while tens were up 1 bp to 2.28…2/10 to 191. The move to higher rates appeared to run out of steam as implied vol leaked out of straddle prices. For example, TYM 129 straddle settled 5’41 Wed and was down to 5’30 yesterday. I would have thought that the palpable risk of higher yields would keep a strong bid in puts, but that fear isn’t being reflected. Midcurve March options expire today… after the close of the pit 0EH 9937 straddle traded 3.0, 2EH 9900 straddle 5.5 and 3EH 9837^ 8.0. A telling trade for me was the covering of a green april position, buying 2EJ 9887p vs selling 9912/9925 call spread. There was 50k of this position outstanding (short puts). First thing in the morning, 10k were bought for 9.5 and another 10k for 9.0. I was surprised the pit would allow a better price on the second batch, and perhaps the buyer was as well, because he stopped. The point is that the market easily absorbed additional selling pressure; seems to be good support at these yield levels.
–Goldman’s Hatzius expressed confidence that sterilized bond buying is on its way from the Fed, also supportive of financial asset prices.
–Today’s news includes CPI expected +0.5 with Core +0.2. Industrial Production expected +0.5, and Consumer Sentiment expected 76.
–From the Christian Science Monitor: “Three in ten young adults live with parents, highest level since the 1950s. A weak economy and high debt levels are prompting more young adults to return to the family nest, a new survey shows.” Once again Seinfeld was ahead of the curve with George Costanza’s pick-up line. “Hi. My name is George. I’m unemployed and I live with my parents.” http://www.youtube.com/watch?v=cKUvKE3bQlY
