March 3. Russian invasion increases economic uncertainty
–Barack Obama condemned the Russian invasion of Ukraine in the strongest way possible, threatening to send in Dennis Rodman.
–Tens, crude oil, gold, corn…all have made new recent highs overnight but have pulled back from extreme levels. $/yen is lower, now 101.30. Global tensions reinforce the theme of having to pay more dearly for the things that you need, and less for the things you don’t. As a distant sidenote, the Chernobyl disaster in 1986 led to a spike in grain prices as Ukraine was known as the agricultural breadbasket of the region. Strip out “food and energy” and prices appear tame. Economic strains on the EU are likely to intensify as uncertainty increases.
–On Friday 5/30 posted a new recent low of 208 (in part due to the new 5 year). One month range 220 to 208. I would think that geopolitical tensions, which are increasingly likely to spill over the globe, would argue for a steeper treasury curve. At the lows, 5’s yielded something like 70 bps compared to 1.47 now (1.51 on Friday afternoon). A true safe haven bid leaves plenty of price upside. This is a reasonable longer term support level for 5/30, and a core outstanding short position might find this turn of events as a catalyst to cover. It’s also worth mentioning that five year vol strengthened relative to longer maturities over the past week. One week ago, FVM 119.5 straddle settled 1’16 or 2.7 vol. On Friday the FVM 120 straddle settled 1’23 or 3.0. In comparison, ten year vol barely moved. One week ago TYM 124.0 straddle settled 2’19 or 4.7 and Friday I marked 124.5^ at 2’14, also 4.7.
–With tens now 2.61 and approaching the lower support band of 250, recall there had been a large buyer of 127.5 calls in April, May and June a couple of weeks ago. Still about 35 bps away, but if 2.50 support gives, then easily doable.
