Dec 27. OTM put buying in April Five Year Notes…a Trump default? :-)
–Quiet session Friday with an uneventful January option expiration. Yields edged lower with a slight flattening bias. Ten year yield fell 1.3 bps to 253.5 while 2’s closed 120, up a fraction of a bp, as supply comes this week with 2’s today, followed by 5’s and 7’s Wednesday and Thursday. The standout feature of Friday’s trade was a new buyer of 150k April 5y 94 puts for Cab-7. That’s a bit over $1mm in premium for puts that are nearly 22 points out of the money. (There was also a buyer of 39k TYJ 92p for cab-7). The current five year cash yield is around 2%, and these puts are at least 4.5% out of the money. Think of it this way, the contract is based on a notional 6% coupon, so par is right around a 6% yield. I don’t know the reason for this trade, but if you have any more to do please feel free to call. Total open interest in April 5yr put options is now 260k, more than in February and March.
–The ECB is now saying Monte dei Paschi needs €9 billion in fresh capital. The market appears fairly confident that the situation will be resolved. For the past three years, the spread between Italian BTPs and bunds has been between 90 and 190 bps and it now around 162. As recently as 2012 the spread had been 500 bps. Maybe the guy paying cab-7 thinks he’s buying puts on Italian paper. Better yet, maybe he thinks he’s protecting himself from the coming Chinese counterfeit bond scandal, where documents have apparently been forged in several recent cases guaranteeing payments (…by Nigerian princes). I made that last part up, but according to a Bloomberg story (and one on reuters) there have been increased defaults and credit premiums are widening. (Echoing my thoughts about US credit spreads from this weekend).
–I mentioned the spread between BTPs and bunds, but I would also note that the spread between bunds and US treasuries is closing out at the year’s high os 234.
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www.bloomberg.com
China Guangfa Bank Co. said Monday that documents and seals for a letter claiming to guarantee bond payments by the lender were forged, in the second such incident in the nation this month, raising concern about transparency in the world’s third-biggest bond market.
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