March 8. End of week summary
Employment data was a bit stronger than expected at 175k with average hourly earnings of +0.4%. Interest rate futures contracts made new recent lows with weakness most notable at the front end of the curve, which I think is probably the biggest takeaway from the week.
While there had been consistent put buying in front of Friday’s data, trade immediately following showed little enthusiasm for further downside. For example, TYJ 122.5/123.5 put spreads were bought in decent size early in the week for 20-22, but right after the number there was a block seller of 10k at 18. Later in the day there was a buyer of TYJ 124/125 call spreads for 12-13 in size of about 20k (appears to be exit).
There was buying during the week of May 124/122.5/121 p fly for 16, which settled 22 on Friday with TYM 123-175. The middle strike of that fly equates to a yield of about 2.93-2.94% on the w/i note to be auctioned this week. Market positioning seems to indicate that the high ten year yield of just over 3% is unlikely to be seriously challenged over the near term. (This level was first hit in August with the Fed’s change of stance last summer, and again at the very end of 2013).
The net result of the week is that treasury vol was hit after the data, and remains under pressure. I marked the TYM 123.5^ at 2’07, or 4.7 vol. Green March Eurodollar 9862^ opened the day around 11.5 bps and closed at 8.5 with a week to go. 2EH 9862 puts settled 2.5, up just 0.5 on the day, with EDH6 at 9866, -8.5 on the day.
When looking at yield levels of 5’s, 10’s and 30’s it’s pretty easy to observe the flattening tendency. For example, high to low yields this calendar year are approx as follow: Fives, 177 to 144, currently 163.5 or 11.5 bps from high. Tens, 301 to 258, currently 279 or 22 from high. 30 yr, 396 to 353, currently 372 or 24 from the high. 5/30 yield spread remains under pressure and is near the lowest level of the past year and a half at 209. Charts of EDM5, EDM6, EDM7 and EDM8 show the same bias. Reds and greens took out Feb lows, golds didn’t. Green to blue midcurve straddles (strikes 100 bps apart) are at their tightest spreads of the year with 2EM 9837^ at 39.5 and 3EM 9737^ at 43.0.
The fact that vol has trouble going bid at new lows is troubling for bears. In the beginning of Feb when we had a stock market scare and large buyer of TYH 125 puts, vol surged to 6.4. Since then it’s been all down hill, with TY vol struggling to even test 5% on the Russia/Ukraine situation. Five year vol has held up relatively well at 3.0, a reflection of curve dynamics.
Rather than list large open interest strikes, I would just note the following. Green June 9837 and 9825 puts have sizable open interest with the upper strike now right at the money. There is a large open short position in 2EM 9825/9975 strangle and in 9837/9887 strangle. Though lower strikes are being threatened, with EDH6 at 9866 vs 9839 in EDM6, the roll of 27 bps makes further downside a steep hurdle to overcome without more bearish fuel.
While the schedule in the US is quiet this week (treasury auctions 3, 10, 30 yr paper), the global situation is much more interesting. As a percent of global GDP, the US share has declined and of course China/Asia has risen. Focus has shifted to China’s economic problems and weakness in the renminbi, and spillover is likely to have major consequences for markets. Whatever the economic data say, the picture from the markets is clearly telegraphing Chinese problems. With last week’s default of solar panel maker Chaori, the copper market was crushed, falling 4% on Friday and 9.5% since the start of the year. Shanghai rebar contract is down 9.7% since the start of the year and closed at a new low. Brazil’s Bovespa had the lowest close in seven months. Gold/silver ratio is again moving higher at 64 and looks as though it may threaten last year’s high of 67. Today from BBG: “China’s exports fell the most since the global financial crisis, dealing another blow to confidence as Communist Party leaders meeting in Beijing assess the risk from the nation’s first onshore bond default… Shipments abroad dropped 18.1 percent from a year earlier, the customs administration said in Beijing today, trailing the median estimate for a 7.5 percent increase in a Bloomberg News survey of 45 economists. Imports rose a more-than-projected 10.1 percent, leaving a trade deficit of $23 billion, the biggest in two years.” While the Chinese may not sell US treasuries, they certainly aren’t buyers if dollars aren’t coming in from exports. Also, the recent weakness in renminbi may accelerate in response to bad trade data. In the US, I think fears will again shift to deflation, but not soon enough for the Fed to change the tapering schedule next week. 5/30 should make new lows.
I’ll end with these predictions about the Year of the Horse:
“If you have a business involving wood or fire you will do well, according to Canadian Feng Shui expert Paul Ng. This includes lumber companies, agriculture and media companies. Property companies won’t do as well and as the horse is a galloper, the potential is for the prices to gallop downwards over the first six months. However, supported by the fire element in the latter half of the year they may gallop back up, according to Lynn Yap, Singapore’s Feng Shui Queen. Metals and waters will do badly: this will affect metal mining and precious metals as well as fishing. Financial business also have the potential to be unstable. We could have predicted that one though.”
http://www.independent.co.uk/news/world/chinese-new-year-2014-what-the-year-of-the-horse-means-for-you-9096775.html
