Feb 28.Clouds forming
—
–Trend to lower yields stays intact. Tens fell another 3 bps to 264. As mentioned yesterday, peak one-year euro$ calendar spreads are closing in on 100 bps, having made new lows yesterday. Highest point is still EDZ15/16 but that is now just 102, fell 3.5 yest. Recent high has been 111. Red/green pack spd new low at 91. Green/blue pack spread just 98.5.
–Fear is shifting to the upside in treasuries. First thing Thursday morning TYJ 125 straddle was trading 1’16, though it faded back to settle at 1’12 as the market eased off its highs. In vol terms I marked 125^ at 5.1 early yest, closed at 4.7. Beware the reach for vol on rallies…been a fade the last two times, but the third time might NOT be a charm.
–It seems as if there are an awful lot of clues building up suggesting violent volatility in the near future. Considered in isolation, they probably aren’t that big of a deal. Russia/Ukraine. China yuan slide and possible impact on Japan/China relations. Loss of faith in Japan QE as evidenced by the halt in the Nikkei rally. California drought. Extreme rallies is some commodities. Problems in Brazil which has stocks there near 5 yr lows. Taken together, the landscape is a bit unsettling.
–Consider the environment leading up to late 2007. In June, Bear Stearns announced that a couple of its mortgage funds were valued WAY less than originally reported. On June 22, Bear pledged a $3.2B loan to bail out the funds. In July/Aug SPX went from 1550 to below 1400, but came back and posted new highs in October EVEN AS OTHER MORTGAGE PROBLEMS WERE BECOMING CLEAR. Then got sliced in half over the next year. I might note in addition, that in the year leading up to the bid sell off, from June’06 to June’07 SPX had rallied from about 1250 to 1575 or around 25%. In the year just ended (Jan to Jan), SPX has rallied from 1400 to 1850 or 32%
