Feb 10. China’s debt and deflation and the US bond contract
–Interest rate futures continue to trade under pressure in follow through from Friday’s jobs data. Today we get NFIB (small business optimism, which has been steadily rising), expected 101 from 100.4. Also JOLTS data which could show more strength in the labor markets.
–Implied vol was generally bid as futures moved lower. Large buyer of 2EH 9875p for 4.0. (Settled 3.75 vs 9892.0, open int up 24k).
–I switched to June contracts in treasuries to track implied vol. The most significant change is, of course, in the 30 year bond contract. Due to the much longer duration of this contract given the cheapest-to-deliver, $/val bp is $246.50 compared to around $169 for the USH (march) contract, or about 1.45 larger. (The CME is using 3 to 2 for the roll). One futures point in USM will be worth only a little more than 4 bps. I marked implied vol from Friday in USH at 10.4…an equivalent value for USM would be > 15% just carrying through the math, but the USM straddle at a whopping 9’04 is only 13.1 (late screen quote was 8’55/9’10). If USM vol were at 15%, then the straddle would be around 10’24. Makes it look as if paying over 9 points for the bond straddle is a good bet. Giddy-up.
–New high in near one-year calendar spreads in dollars. March15/16 rose 0.5 to 80 and June15/June16 rose 2 to 87.5, now the peak one-year spread, equaling Sept15/16 which is also 87.5.
–In skimming the news this morning I saw about five or six references to China’s debt and inflation. What if the story isn’t about Greece and the EU, but really about China? From BI, “China’s debts as a proportion of GDP climbed from 144% in 2007 to 245% in 2014.”
From ZH: “For the 34th month in a row, Chinese Producer Prices (PPI) fell YoY (dropping 4.3%, missing expectations of a 3.8% deflation).” CPI is also at a five year low, though positive. What have other countries done to combat lower inflation? Depreciated their currency. Which leads to a stronger dollar and decreased inflation in the US. No wonder the curve flattens every time it seems more probable that the Fed is close to hiking…
