Jan 18, 2018. Short end yields post new highs
–Yields rose yesterday with tens up 3.3 bps to 257.4. Last year high yield was 262.7, should equate to around 122-09 in TYH; this morning’s low so far 122-12+. There were some analysts attributing weakness in bonds to AAPL’s announcement of repatriation which will cause a $38 billion tax bill to Uncle Sam; the idea being that perhaps AAPL would have to sell some holdings to raise the cash. However, that amount, even if it was ALL treasuries, isn’t huge. I saw an article this morning that Ripple’s co-founder alone has lost $44 billion since the high made in that crypto ccy earlier this month. On the other hand, the idea of repatriation and re-investment in the US as a whole certainly has some bearing.
–2 and 5 year note yields making new highs (2yr closed at 2.04%). Weakest part of the ED strip was Blue pack (4th yr) which closed -4.75. All near eurodollar calendars made new highs as well, with EDH18/EDH19 at 52.5, just shy of the previous cycle high in Z7/Z8. Jan’18/Jan’19 FF spread closed over 5/8%, at 63.75 bps. The market is accepting the idea of a string of near term hikes, yet the red/green pack spread is just barely over 10 bps.
–If one-year ED calendars become comfortable in the 50-60 bp area, then one year midcurve puts seem cheap. For example, with an assumption of hikes in March and June, and a widening EDM8/EDM9 spread (now 38.5), it’s not hard to see EDM19 at or through the 9737.5 strike. 0EM 9737p settled 4.5. Of course, looking at EDM19/EDM20 spread at just 11 bps, it’s really the green mids that could blow up.
–Several articles about possible termination of NAFTA, as the President goes to Davos to put a further chill on global trade. So far nothing matters…and I’ll note that China’s GDP was reported +6.9%.
–There was a buyer of some 45k TYH 124call late yesterday for 8/64’s. (Settled there vs 122-21, 17d, 7 weeks til expiry). Open interest in the strike rose by 32k so it appears new. However, there was also a seller of some 10k TYH 123c earlier at 45-46. In general vols are stuck in the mud. Blue March 9737.5 straddle 17.5s ref EDH21 9739.0, with the contract -4.5 on the day.
–News today includes Jobless Claims, Housing Starts and Philly Fed, with latter expected 25.
