Honing my reasoning skills

March 12, 2021

–Tens settled essentially unchanged and bonds slightly lower as the Treasury completed the 30y leg of the auctions.  Post-auction, there was a buyer of some 70k EDZ22 at 9958.5 and a block buy of 4k USM 158-06.  While there was a temporary boost from these buys, it didn’t last.  As of this writing USM is 1.75 points  lower at 156-13 and EDZ2 is 9955.5.  One contact noted that EDZ2 buys could be flattening short deltas from a large long put spread/short call position.  In any case, EDZ2 was the peak volume across the ED curve with just over 400k traded. EDU2 was next closest at 323k, all else below 300k.  Z2 open interest rose 29k; it would have fallen if it were pure short covering of futures.  Apart from market stats like volume and open interest, the message is that large buys were faded; what appeared to be a big sigh of relief, having gotten thru CPI and auctions, looks much more tentative now with USM trading near the low for the entire move.

–Today’s news includes PPI with Core yoy expected 2.6%, and U of M inflation surveys.  Last time the 1-yr was 3.3%, highest since 2014, and the 5-10 yr was 2.7%, which equals the high from 2016 and 2020.  It might be worth noting that CLJ1 settled 66.02, just 7 cents shy of the high settle this month and less than $2 away from the March 8 high tick of 67.98.  I don’t know the window for the UofM survey, but the 3/1 close for CLJ1 was 60.64, and the price-at-the-pump increase in the Chicago area is noticeable in the past few weeks, as is the general pick up in traffic. 

–One last note is that the ten-year inflation breakeven ended at a new high yesterday of 228 bps.  I am not sure if tips are reacting to Fed buying or if there are other anomalies, but others had cited the 5-yr breakeven having pierced 250 bps last week.  The FT is all over it with this headline: ‘US bond market signals expectations for shortlived burst of inflation’.  I am personally getting a bit sick of the argument that inflation can’t possibly be sustained with slack in the labor force (though I don’t know if the FT is making that case since I didn’t read the article).  We are all aware of the phenomenon of pricing power returning when weak competitors fail.  When I think of finely crafted and well-reasoned arguments, I invariably fall back to Cliff Clavin in Cheers: 

“Well ya see Norm, it’s like this:  A herd of buffalo can only move as fast as the slowest buffalo.  And when the herd is hunted, it’s the slowest and weakest ones at the back that are killed first.  This natural selection is good for the herd as a whole because the general speed and health of the whole group keeps improving by the regular killing of the weakest members.  In much the same way, the human brain can only operate as fast as the slowest brain cells.  Excessive intake of alcohol, as we know, kills brain cells.  But naturally, it attacks the slowest and weakest brain cells first.  In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine.

That’s why you always feel smarter after a few beers. 

Posted on March 12, 2021 at 5:34 am by alexmanzara · Permalink
In: Eurodollar Options

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