Oct 4. We have BOTH kinds, country AND western

There was some degree of surprise associated with yesterday’s jump in rates.  Could the bond market be getting away from the fed after Powell lavished praise on current economic performance?  All yields made new highs on the year with tens up 10.3 bps to 315.7.  It reminds me of an  old favorite country song that starts like this:
Put another log on the fire
Cook me up some bacon and some beans
And go out to the car and change the tire
Wash my socks and sew my old blue jeans
Come on baby, you can fill my pipe and then go fetch my slippers
And boil me up another pot of tea
Then put another log on the fire babe
And come and tell me why you’re leaving me
The bond market has been doing some of the heavy lifting with respect to easy financial conditions.  Why are rates going up?  End of the pension break in mid-Sept that had created demand for longer dated assets.  Increase in the Fed’s balance sheet normalization to $50b/month.  Extra supply associated with massive fiscal deficits. Jump in cross-currency basis as 3-month terms covered the turn (reflects funding pressures in terms of foreign buyers’ demand for US paper according to Bill Gross). Brainard’s speech 2 weeks ago about the rising neutral rate that the Fed maybe actually not only have to catch up to, but exceed (echoed by other Fed officials including Powell).  Maybe it’s because oil is surging and other commodities are following suit despite a firm dollar. Put another log on the fire.
–Perhaps this Friday’s employment report will show softer conditions and a smaller rate of increase in wages than expected.  In that case, it’ll be like a country song played in reverse: You get your wife and your pick-up truck and your dog back (in reverse order of importance as well). But the breakout in yields yesterday is unlikely to completely vanish.  Open interest on all treasury contracts surged with tens +90k and 30’s +33k, helping to confirm direction.  All near euro$ calendar spreads made new recent highs with EDZ8/EDZ9 for example, leaping 6.5 bps to settle 53. The curve bear steepened, which the market is NOT set up for. 2/10 up nearly 6 bps to a new recent high of 30 bps.  Selling continued after the floor settlements.  For example, reds and greens settled -7.0 and -8.625 and were offered -8.75 and -10.75 before the electronic close.  The ten year inflation indexed (real) yield rose 7 bps and almost touched 1% for the first time since 2011.
–There was a huge seller of 2EZ 9675 puts, >150k at 8.5 covered 9679.5 (or 21.5 in the straddle) that held vols down early in the session and looks to be an exit with OI -65k.  This straddle settled 22.0 vs 9676.5, but was 22.5/23.5 late with futures through the strike at 73.5.  USZ straddle back above 7%, but the Nov atm 138.5^ settled just over 2 points at 2’02 with the futures down exactly 2 points on the day.  Earlier in the week the Nov atm straddle was more like 1’54.
–Sit back and watch the conflagration.
Now don’t I let you wash the car on Sunday
And don’t I warn you when you’re gettin’ fat
Ain’t I a gonna take you fishin’ with me someday
Well, a man can’t love a woman more than that
Pop Goes The Country. 1975


Posted on October 4, 2018 at 5:24 am by alexmanzara · Permalink
In: Eurodollar Options

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