Bullet-proof? Maybe in Australia
March 3, 2021
–Stocks surged, the curve flattened. Tens fell nearly 5 bps to154.5 before today’s auction (w/i was 155.5/155 at futures settle). 2/10 dropped 5.3 to 138.0. A tweet from Stephen Spratt (BBG) this morning: “RBA has gone bullet-proof on yield curve control program. By changing the repo borrowing cost for YCC bonds to 100 bps vs 25 bps normally, short selling just got incredibly expensive [on longer maturities]” As I would interpret this, it’s like a targeted rate hike, something the Fed vows not to do. Central banks appear to be open to ever-more proactive measures in an attempt to control rates. However, control in one place often leads to unexpected results in others. I think “bullet-proof” is overstating it, but I like the enthusiasm.
–The eurodollar curve flattened as well, with the red pack essentially unchanged and the golds +6.0. Volume was light. Implieds fell. EDU1/EDU2 one-year calendar edged to a new high of 14.5, up 0.5 on the day. There continues to be heavy buying of 9975/9962/9950 put butterfly on the EDU2 contract. On Monday +50k 0EQ version for just under 3 bps and yesterday it was the 0EU version which settled 2.75 vs unchanged futures at 9967.5 on volume >70k. Breakevens are essentially 9972 to 9953. These trades suggest reds are pretty much locked in, though higher inflation numbers could still create tension in this part of the curve.
–CPI today with yoy core expected 1.4%. Ten year auction as well, followed by thirties tomorrow. Monthly Budget Statement in the afternoon. GO BIG.
–The attached chart shows June Gold (GCM1) overlaid with aggregate open interest. It appears as though this year’s washout in gold prices has been accompanied by a drop in open interest (blue line), possibly indicated that weak hands have capitulated.
