April 12. I musta got lost….now I hold a losin’ hand
–Brief mentions of many changes this morning, as yesterday was a big day indicating a sentiment shift.
–Market is starting to sit up and take notice of geopolitical events. Many signals of a moderate increase in stress. Implied vol went to new highs for the year in VIX, Gold. Also, the spread between Italy and German bund posted a new high of 207.7, highest since early 2014. Skews in treasuries blew out with demand for calls. For example TYM 124/127 combo covered 125-16 was 8/9 late in the day….it had been more like 5/6 a week ago, as TYM 127 calls were bought in size. TYM 127c now claim peak open interest (in calls) at 177k, having added 39k yesterday; settled 30/64 ref 125-155, 29 delta.
–July FF traded up to 9896…a small shave in odds of hike in June. The move from 9894 to 96 takes odds from about 65% to 57%. Additionally, many calendar spreads made new lows on the dollar curve. For example, EDM7/EDM8 plunged 5 bps to settle 37.5. Interestingly, the peak one-year spread has slid back on the curve to EDZ7/EDZ8 which settled 38.5 and unseated EDM7/M8. So now the nearby 1-yr spreads are clustered at 3/8% and taper from there. New low in red/green euro$ pack spread at 28.375. NY Fed’s Simon Potter’s speech last week was pretty concerned with monetary policy transmission signals from FF’s; the market is transmitting a message that it’s back on the ‘one-to-two’ hike a year schedule.
–While equities came all the way back from a morning swoon, fixed income maintained a solid bid, rallying in the face of the ten year auction, with 30’s coming today. Fives and tens are at the lower bounds of 4 month ranges (in terms of yield). Either these levels hold, or there’s likely to be a fairly violent adjustment lower.
*The subject title is taken from lyrics of the J Geils Bank
https://www.youtube.com/watch?v=CvM8WV2V998
