Oct 17. The Taylor Put
-The short end of the market traded heavy throughout the day on Monday, with early weakness spurred by stronger than expected Empire State data. Put buyers were active; early buyer of 50k EDZ7 9837p for 0.25. A later example was +10k 2EH 9762.5p for 6.5 ref 9789.5, and then to top it off, a buyer of 125k 0EZ 9785.5p for 2.0 (ref 9807), as it was reported that Trump was favorably impressed by an interview with Taylor as a Fed Chair candidate. (Today Trump is reportedly meeting with Yellen). As mentioned during the day, EDZ8 has the most open interest of any contract aside from EDZ7, with a gain of 47k positions yesterday and total OI of 1.65 million.
–Reds were the weakest part of the curve, closing down 6.625 bps. On the euro$ curve, near spreads jumped to new highs, with the peak one-year calendar, EDZ7/EDZ8, up 5 on the day to 43.0. Dec/March rose 1.5 to close at a new high of 14.5. Further back, all measure of the curve plunged to new lows for the year. For example, red/gold pack spread closed at just 38 bps. 2/10 treasury spread at 76.7, (down 1.8 bps) and 5/30 closed 86.7, down 4 bps. Although industrial commodities were strong, with copper surging to a new high and oil holding on to the morning’s gains, the idea of an inflation premium is evaporating.
–There’s a function on Bloomberg, TAYL, that allows for an estimate of where the Taylor Rule would target Fed Funds. Currently it’s 3.75% as opposed to the upper end of the target currently, which is 1.25%. So while the old “Greenspan put” suggested that the Fed’s response to equity market weakness was the equivalent of massive put selling, the Taylor put is more straightforward: BUY PUTS ON THE SHORT END.
–Today’s news includes Industrial Production expected +0.2 with Capacity at 76.2.
