January 31. New lows in yields but implied vol tame.

–Friday featured new lows in yields, with tens down 8.2 bps to 167.3, having tested the low yield level from 2013, at 163.  30 year bond also hit a record low yield just below 225.  Many yield curve spreads made new lows, for example 2/10 closed 120.4 (vs 128.5 the previous Friday).  The peak one-yr euro$ spread, Sept’15-Sept’16, closed at a new low of 69.5, down 6.5 on the day.  Last week I had suggested that the red/green/blue pack butterfly might decline to the upper teens…Friday to Friday move was 27.25 to 21.5.
–Of some interest is the plunge in the ten year inflation indexed note yield, from 20.7 bps to just 2.1 in the space of a week, down over 10 bps on Friday alone.  At the end of 2014 the yield was over 50 bps.  There hasn’t been a negative real rate on tens since the middle of 2013; the low was -91.7 at the end of 2012.  As a point of comparison, the yield on the 5yr tip is -32 bps.  The low set in 2013 was -177 bps.  But 5’s also ended the year of 2014 in positive territory at nearly +50 bps.  So, while oil (CLH5) soared $3.71 on the day, over 8% to 48.24, market based indicators of inflation seem decidedly soft.
–Previously as yields fell, implied vol was bid up.  On Friday, there was a new seller of TYH5 132c and 132.5c.  Open interest in both calls was higher according to prelim figures, with 132c +16k and 132.5c +12k.  The 132 strike is about 13.5 to 14 bps away from Friday’s settle of 130-28, while the 132.5c is 20 bps away, approx yield levels of 153.5 and 147.5 on the current ten year.  So, this week we have seen vol generally contained even as yields moved lower and equities traded on the soft side.  I marked the atm TYJ (April) straddle at 6.4 one week ago vs 6.1 Friday.  It appears that the upside in rate futures might be contained due to this option activity, unless equities take an unscheduled swan dive.

 

Ten Yr TIP yield just 2 bps

Ten Yr TIP yield just 2 bps

Posted on January 31, 2015 at 12:14 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply