Dec 12. It’s all about oil…
–Robust retail sales data caused an early pullback in interest rate futures, but the continued sell off in oil erased those losses in the long end of the curve, with weakness concentrated in the belly. Green eurodollar pack was the underperformer, closing -5.0 bps on the day, while the 30 year bond yield was actually slightly lower by the close. The curve posted new lows, with 5/30 down 3.5 bps to just under 123. New low in red/gold pack spread at 147.6. Demand for the bond auction was surprisingly strong, with a yield of 284.8, well through the 287.5 yield just prior to the sale. Shortly after the auction, Jan Crude oil broke through $60/bbl and a new round of buying came into treasuries, concurrent with selling of equities.
–Implied vol is firming directionally with prices. For example, USH atm straddle settled at 4’20 yesterday vs 4’00 two days ago. Eurodollar straddles were also MUCH better bid. For example, a buyer of 5k EDZ16 9800p for 45 took the 9800 straddle up 1.5 bps to 103.5. My guess is that the surge in junk bond spreads to new highs is being reflected by juiced up premiums for greens. Manic back and forth price action in equity index futures is also supportive of vol measures, with the VIX closing above 20, pretty much the high for the year except for October’s spike to 30.
–As of this writing, crude is weaker again, closing in on $59, and stocks are at new lows for the month. If the entire edifice of global finance is starting to teeter on the back of plunging oil prices, it would make sense that some type of official response to stop the decline might be floated. But at this point structural cracks are becoming more obvious, and geopolitical considerations of the major players are a dominant theme. Even though some trends might reverse if oil were to bounce from here, the sense of increased risk remains.
