April 12. Obama and Yellen
–Though interest rate futures barely moved, other markets continue to suggest a bias toward risk off. For example, stocks snatched defeat from the jaws of victory, having been trading positive virtually all day and then closing down 6 at the low end of the day’s range (ESM). Gold was up over $14/oz late, and silver surged 59 cents. however, copper was unchanged to slightly lower at the end of the day. Alcoa kicked off earnings season by warning of subdued global growth.
—On the same topic, of global growth that is, Obama met with Yellen yesterday just as Bernanke put out another blog discussing helicopter money, or, as he puts it: “…an increase in public spending or a tax cut—financed by a permanent increase in the money stock. [with the moniker] Money-Financed Fiscal Program, or MFFP.”
–The WH press sec’y suggested O and Y would talk about the trajectory of the US and global economy. Again, back to the Bernanke blog, “The most difficult practical issues surrounding MFFPs involve their governance—who decides, and how? Unlike orthodox fiscal and monetary policies, MFFPs would seem to require close coordination of the legislature [or PRESIDENT???] and the central bank, which may be difficult to manage in practice. To the extent that that coordination is successful, some worry, it might put at risk the longer-term independence of the central bank. Another concern is that the option of using money finance might be a “slippery slope” for legislators, who might be tempted to use it to facilitate spending or tax cuts when such actions no longer make macroeconomic sense.” Well, I for one, certainly would never think that the President would try to influence monetary policy….
–Interview with Bill Gross in Barron’s over the weekend. Sort of instructive in that he says that tens and bunds yield nothing, but if you sell strangles you can pick up extra yield and get a decent return as long as the market remains stable. All very reasonable, but this line of thinking points up, to some degree, the reach for yield which has vol suppressing characteristics. Right…to get a yield we have to introduce leverage and writing options.
—Little net change in interest rate futures yesterday. There were several large trades in options with EDU6 as the underlying contract, targeting the 9925 strike (EDU6 settled 9924.5). For example July 9937/9925/9900 p butterfly (broken) ppr paid 1.25 for 50k. There was also a buyer of 10k or more EDU6 9912/9925/9937 put fly for 2.0. Taken on their own, these trades would seem to indicate no chance of a hike in June. After all, EDH6 settled just above 9936.0 and the libor setting on Monday was 0.6299…call it 63 bps or 9937.0. Since the beginning of the year 3m libor has varied between 0.642 and 0.6126, or in futures terms 99.355 and 99.3875. So, if the Fed does not hike in June (or is not expected to, as the meeting is right after June expiry), then EDM should go out around the 9937.5 strike, leaving the July or Sept meeting for a possible hike. As this point, that idea seems reasonable. If the Fed WERE to hike in June, these trades do NOT look good, EDU would instantly trade 9912.5 or below.
–Again, the idea is that the Fed does NOT hike in June, but the market assigns 50/50 odds of a hike either in July or Sept. In that case these trades work, though an actual hike in July would hurt the Sept expiry. As I have mentioned previously, I think a better structure is to sell EDM6 9937p and buy EDU 9925p for 1.75.
–Below is a chart of May Vix. Appears to be breaking out of downward sloping channel. Another hint of risk-off to come.
–The WH press sec’y suggested O and Y would talk about the trajectory of the US and global economy. Again, back to the Bernanke blog, “The most difficult practical issues surrounding MFFPs involve their governance—who decides, and how? Unlike orthodox fiscal and monetary policies, MFFPs would seem to require close coordination of the legislature [or PRESIDENT???] and the central bank, which may be difficult to manage in practice. To the extent that that coordination is successful, some worry, it might put at risk the longer-term independence of the central bank. Another concern is that the option of using money finance might be a “slippery slope” for legislators, who might be tempted to use it to facilitate spending or tax cuts when such actions no longer make macroeconomic sense.” Well, I for one, certainly would never think that the President would try to influence monetary policy….
–Interview with Bill Gross in Barron’s over the weekend. Sort of instructive in that he says that tens and bunds yield nothing, but if you sell strangles you can pick up extra yield and get a decent return as long as the market remains stable. All very reasonable, but this line of thinking points up, to some degree, the reach for yield which has vol suppressing characteristics. Right…to get a yield we have to introduce leverage and writing options.
—Little net change in interest rate futures yesterday. There were several large trades in options with EDU6 as the underlying contract, targeting the 9925 strike (EDU6 settled 9924.5). For example July 9937/9925/9900 p butterfly (broken) ppr paid 1.25 for 50k. There was also a buyer of 10k or more EDU6 9912/9925/9937 put fly for 2.0. Taken on their own, these trades would seem to indicate no chance of a hike in June. After all, EDH6 settled just above 9936.0 and the libor setting on Monday was 0.6299…call it 63 bps or 9937.0. Since the beginning of the year 3m libor has varied between 0.642 and 0.6126, or in futures terms 99.355 and 99.3875. So, if the Fed does not hike in June (or is not expected to, as the meeting is right after June expiry), then EDM should go out around the 9937.5 strike, leaving the July or Sept meeting for a possible hike. As this point, that idea seems reasonable. If the Fed WERE to hike in June, these trades do NOT look good, EDU would instantly trade 9912.5 or below.
–Again, the idea is that the Fed does NOT hike in June, but the market assigns 50/50 odds of a hike either in July or Sept. In that case these trades work, though an actual hike in July would hurt the Sept expiry. As I have mentioned previously, I think a better structure is to sell EDM6 9937p and buy EDU 9925p for 1.75.
–Below is a chart of May Vix. Appears to be breaking out of downward sloping channel. Another hint of risk-off to come.
