Attempting withdrawal
August 27, 2021
–Top story from yesterday was the bombing at the Kabul airport, which effectively closed the circle of US policy: Exit the forever war, take casualties in a disastrous evacuation, tell the Generals you will give them whatever they need to hunt down perpetrators, send more troops to fight… however long it takes. Except now the enemy has much better hardware. Ours. That’s ok, we’ll buy more. Using parts from China. From evacuation to eviction…the Supreme Court struck down the CDC’s moratorium on evictions, saying it would be up to Congress to pass a law to continue the policy.
–Against this backdrop, Powell gives a virtual Jackson Hole presentation, with Fed presidents clamoring for taper. His challenge is to separate taper from rate hikes, to ensure buyers of treasuries they will be guaranteed positive carry over the foreseeable future. Stocks have mostly just shrugged at the outside world, though the potential withdrawal of liquidity at the margin could become an issue. Of course, the Fed went to great lengths to set the foundation for a SMOOTH withdrawal, including unlimited repo facilities.
–Oil is up nearly $1 this morning with CLV1 68.33 as storm Ida looms on the Sunday anniversary of Katrina (2005). Bonds rallied on Katrina, but the move was quite short-lived (tens were over 4% at the time, briefly surged from 4.20 to 4.02).
–Yesterday, net changes in rates were small, with tens ending around 1.34% with TYU settling 133-19 as Sept options expire today. In dollars, option trade continues to favor the downside, beginning with a 50k early morning block buy of 50k 3EV 9837/9812ps for 4.5. Settled 4.0 vs EDZ’24 9858.5. There was continued buying of 0EX1 9962/9950p 1×2 for 1.0 (settled 1.25 vs EDZ’22 9953.5). Total up to 80k now. Buying as well in 0EZ 9950/9937p 1×2 for flat (settled there). This position also likely 80k. By far, 0EZ puts have the most open interest at over 2 million with primary strikes as follow: 9962p 12.75s 379k OI. 9950p 6.5s 516k OI. 9937p 3.25s 575k OI. 9925p 1.75s 229k OI. These Dec midcurves are based on EDZ’22. The EDZ’21/EDZ’22 spread is 27, so at least one hike is being priced over the year (9980.5 / 9953.5). Recent range is 20 to 30.
