It’s FINE. I hedged with futures
October 26, 2023
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–Stocks slid yesterday with SPX -1.4%. However, treasuries continued to push higher in yield in a bear steepener. 2y up just over 5 bps to 5.12% while tens rose 11 bps to 4.95% and 30s +12.5 to 5.086%. According to prelim CME sheets, open interest exploded across the treasury complex:
TU +24k
FV +89k
TY +38k
UXY +15k
US +19k
WN +8.5k
Sort of funny that Ackman had sparked a bond rally by saying that he had exited shorts a few days ago, but now there are huge new positions as yields soar. There is a large deep-in put trader driving some of the action. Yesterday, Week-4 Wednesday TY 108.5 puts were exited in a sale of approx 45k at 2’53. TYZ3 settled 105-215, so those puts were 2 53/64 in-the-money. On Friday, November treasury options expire, and the same guy bought 50k TYX3 107.5p for 1’53. These puts have nearly 1.0 delta. Huge trades. Latter buy >$70 million.
So TYX3 107.5 puts added 40k in open interest and the TY contract added 38k (full hedge). Attached chart shows open interest (lower panel) and price of the Wed 108.5p. 40k bought on Friday and exited yesterday.
–There were a couple of large SOFR option trades as well. Buyer 20k SFRU4 9625/9725cs 12.0 to 12.25. Settled 11.75 ref 9506. Buyer 40k SFRM4 9475/9450/9412.5/9362.5 put condor 8.75/9.0, settled 8.75 vs SFRM4 9481.5.
–Five year auction poorly received yesterday with yield 4.899 vs 4.88 just prior. Bid/cover just 2.36 vs over 2.5 at the last one. Today, the seven-year is auctioned.
Q3 GDP is expected 4.3%. Probably the last of the positive surprises the admin can crow about. However, there was an interesting comment by McConnell, that the Ukraine conflict is building up the US industrial base (to make weapons) while no Americans are getting killed in Ukraine. Here’s the link. It’s astonishingly depressing. Weapon manufacturer to the world, but we can gingerly sidestep the negative consequences. The logical extension is that we should start more wars…
https://twitter.com/NorthmanTrader/status/1717120808697344459
–ECB this morning.
–I saw a headline this morning that Morgan Stanley (new low for the year yesterday) was facing challenges in its wealth management division. The investing public has already become acquainted with Treasury Direct, pulling money out of low yielding bank deposits and going into t-bills. How about the “wealth managers”? SPX up about 9% (before fees) on the year and looking vulnerable. Or do I just avoid the volatility and fees and take 5.1% on two-year notes?
–On a grander scale, it’s not really the Fed that has “lost credibility”. It’s the Federal Gov’t. That, to me, is the implication of rising yields. The Fed is simply boxed in.
