Feb 8, 2018. Reach for yield morphs into panic for funding

–The two year budget deal reached yesterday sparked a fresh bout of selling in fixed income, with the ten year yield up over 7 bps to 284.2, and a slight new high in 2/10 spread at 71 bps.  Increased spending is going to translate into higher debt issuance, even as the Fed continues QT.  This morning Kaplan noted financial turbulence and said the Fed would be vigilant about spillovers into the real economy, but said his ‘base case remains the same’.  Rate futures weak across the curve.  EDH8 prints a new low of 9805 this morning and the bond contract at 144-12 is threatening new lows.  By the way, a few days ago EDH8 9812.5 straddle was trading 4.0, now it’s 7.5 intrinsic with 40 days to go.  EDH8 9787.5 puts went 0.25 bid late in the day!  While there was selling in treasury vol from the early part of the session Wednesday, the front end is feeling a bit panicky.  I’ve seen some research trying to quantify vol strategies as a percent of the entire market (I think I saw 6%), but it reminds me of the subprime crisis – at that time people thought subprime wasn’t significant enough to ripple through the financial chain.  The problem with optionality is that it can get big in a hurry.  In any case, it feels like a problem in funding markets could be percolating.  By the way, I’ve attached a chart of the ten year inflation indexed note yield which is now 72 bps… does an increase in real yield provide competition for stocks?  In a broader scope, I would note that all of these vol selling strategies were part of the REACH FOR YIELD that the Fed engineered by forcing the investing public into riskier assets.  Huge expansion of balance sheet, force yields down and move the public further out the risk curve, and now someone lit a match.

–Thirty year bond auction today.

Posted on February 8, 2018 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply