Fed support now unlimited
March 24, 2020
–The Fed removed any guise of the illusion that it only would accept top-rated collateral, and has even taken the step to create a special purpose vehicle to support buying anything it feels the need to, while Congress remains on the verge of passing a $2 trillion stimulus bill. This morning, markets are responding with ESM clawing higher and approaching the spike high after yesterday’s Fed announcements (unlimited buying of treasuries and CMBS, at least $75 billion in treasuries each day this week). Yesterday’s high in ESM0 was 2386.00, there is clearly patient buying occurring around 2190 to 2210, and current level is 2333. DXY appears to have left a double top around 103 and now trades around 101.50, another positive sign. Gold has soared $150 in the past three sessions (GCJ0 now 1632) and silver has jumped $2 to current 14.10 (SIK0). Ten year yield yesterday fell 18 bps to 0.75%, but the yield has rebounded to around 83 bps today with implied vol starting to soften. Peak contract on the ED curve is EDH21 at yesterday’s settle of 9967.5, while the highest FF contracts, Aug, Sept and Oct are 9993.5 or 6.5 bps. Curves flattened with 2yr down 6.4 bps and 10yr -18 bps. It’s hard to hold a long-end short position when the Fed announces it will buy everything. On the other hand, there was noticeable buying of TY vs US in futures yesterday off the lows in that spread; 10/30 cash yesterday ended at 58 bps.
–Obviously demand has been and will continue to be crushed (Eurozone Mfg PMI only 44.8), but CLK0 is up 1.60 this morning to near $25/bbl. Markets have priced in a lot of pain; sellers should be nearly exhausted in the short term. April treasury options expire Friday. TYM0 settled 138-06+ yesterday and the TYJ0 138.25 straddle settled 1’21. That’s just about equal to yesterday’s range in TYM which was 1-11.5/32’s. It wasn’t too long ago that TY straddles would trade around 1 point with five weeks until expiration. That was then, this is now.
Just another manic Monday
March 23, 2020
–Stocks have fought back and are off the -5% limit as of this writing, with initial selling pressure the result of more bad virus news and congressional wrangling prior to passing a big emergency rescue package. EDJ0 (April 3-month euro$) is currently down 8 bps at 9906, or 94 bps, with tremendous demand for near term funding. However, EDU0 is unch’d and further back there are gains, with golds +3.5 to 4. There are warnings about the commercial mortgage market seizing which isn’t too surprising given that cap rates had compressed and it was one sector that the Fed had cited for risk before anything even occurred with the virus. All of the lobbies that had been re-modeled with seating and gathering areas are just empty, with office employees now opting for the purchase of stay-at-home slippers.
–On Friday I marked tens down 19.5 bps near the futures settlement time, at 93.4 bps. Current TYM is 137-205, +29/32’s which is around another 10 bps. Red pack in euro$’s is +2.5 currently; the curve is flattening.
–A headline on Reuters says Goldman expects global GDP to decline by 1% this year. Seems shockingly inconsequential given that the same firm looks for a plunge of 24% in US Q2 GDP.
–A doctor in Italy was quoted as saying that they are not treating patients over 60 due to limitations on medicine and equipment. The question going forward is who decides which companies are going to get a life-rope of near zero rate funding in order to survive. This process will take over a year to play out in my opinion, even if the virus can be contained over the next three months.
–Markets remain wide with little volume.
Going to the Mattresses
March 22, 2020 – Weekly Comment
Everything you really need to know is in The Godfather. Mostly you just need Clemenza.
Michael: How bad do you think it’s gonna be?
Clemenza: Pretty goddamned bad. Probably all the other Families will line up against us. That’s all right. These things gotta happen every five years or so, ten years. Helps to get rid of the bad blood.
This is a great summary of charts and spreads on the week
https://www.zerohedge.com/markets/stocks-suffer-worst-week-lehman-despite-biggest-fed-bailout-ever
It was an extraordinary week. Despite herculean efforts by the Fed and the administration, culminating in the Fed announcing $1 T in overnight repo ops daily through the end of March, SPX closed on the low Friday, ending the week down 15%. The peak to this week’s low has been 32% in 21 trading sessions. By comparison, the 2007 to 2009 sell-off was 57% and took 17 months. A similar draw down would put SPX at 1460, a bit higher than double the 2009 low.
I have to confess I thought by the middle of last week that the various rescue packages would be enough for a tradable bounce in stocks. In light of Friday’s close, I am thinking more about the WeWork episode. Early last year, the company was valued at $47 billion, but shortly after the IPO papers were filed in August it imploded. Why? Because the funding for a cash-hemorrhaging company dried up. The Saudis wouldn’t keep pouring money into Softbank to prop up We. In essence, the MODEL WAS BAD. As noted by the Guardian, “The company is essentially renting long and subleasing short, leaving itself exposed to the same risk as financial institutions that fund themselves with short-term borrowing while maintaining long-term funding commitments.” Classic liquidity mismatch, with the added bonus feature of growing losses. One might ask, “Couldn’t it have continued if the financing just kept coming through?” Yeah, but the model was always a cash-losing proposition.
I saw a stat that 17% of the world’s 45000 public companies haven’t generated enough cash to cover interest costs for at least the past three years. These are the zombies. The Fed’s (and other CBs) low rate policies that drove investors to reach further out the risk curve gave rise to the living dead. It’s a bad model. Now we need to get rid of the bad blood. New financing at low rates to uneconomic agents isn’t the answer. That, I believe, is what the stock market is concluding.
The hits keep coming. On Friday Ronin Capital couldn’t meet its margin and was closed, with positions auctioned to other firms on Friday. Though the problem for Ronin was said to be VIX, the firm was also a large market maker in ED options. A downgrade for short-end liquidity.
I wouldn’t be surprised if some ETFs are shuttered in coming days, especially the levered doubles and triples. From Jonathan Tepper of UnHerd.com, “While the ETF shares trade daily by the second, the underlying bonds are not easy to trade on their own. In the old days, insurers and pension funds bought these bonds, put them away in a drawer and never traded them. Today investors expect instant liquidity from an illiquid investment. Liquidity mismatches are as old as banking itself….the problems of ETFs have been known all along, and the outcome has been inevitable.” The underlying fragility of this system is now exposed. My guess is that the double and triple levered ETFs will be declared illegal in a year or so. “In the words of Christopher Wood from Jeffries, ETFs ‘commoditize equity and bond investing in an insidious way which ultimately creates a dangerous illusion of liquidity. True, ETFs are cheap. But so is fast food.’”
Reuters reports that Goldman injected $1 billion of its own funds into its prime money market funds after heavy withdrawals. It immediately made me think of Bear Stearns using its own capital to prop up a couple of its mortgage funds in 2007. Bear who? As Clemenza said, “Oh Paulie? Won’t see him no more.” I’m sure it’s not the same thing, as GS just bumped CEO David Solomon’s pay 19% to $27.5 million. Probably felt like they had to plug the hole left from D-Sol not being able to DJ at his side-gigs. (Of course, that’s a little unfair, as he donates all earnings from DJ gigs to charity). The point is, how tone-deaf can GS be? The Marcus division of Goldman is offering a one-year CD at 1.85%, and on its ads shows Chase at 0.01%, Citi at 0.50% and Wells at 0.15%. A plea for funding?
The Fed Chairman makes $203,500 per year. Mark Cuban says any US company that gets a bailout should never again be allowed to buy back their own stock. Jeffrey Gundlach tweeted, “I don’t think gov’t bailouts of overleveraged companies that got over leveraged via share buybacks at all-time highs, enriching executives and hedge fund investors, will sit well with the American people.” Here’s my rant: the admin and Fed (if they are to buy corporate debt or shares) should name the companies prior to any action. If a company accepts the investment bailout, then the board and c-suite should not be allowed to make any more than the Fed Chairman for two years. No bonuses. No deferred stock compensation. If a company declines help, and thinks they can survive on their own, they were probably well managed in the first place, and can continue doing whatever they were doing.
Leave the gun. Take the cannoli.
OTHER MARKET/TRADE THOUGHTS
EDM0 9950 straddle settled 31.5 ref 9945.5. EDU0 9962 straddle settled 24.5 vs 9960.5. 7 bp inversion of atm straddles. Well, I haven’t seen that before. Actually, EDM0 9950 straddle is just one bp below the atm straddle a year later: EDM1 9962 straddle is 32.5 vs 9961.0 settle.
From Guy LeBas on twitter: “The t-bill issuance this will entail is going to be absolutely insane.” He’s referring to the tax date change from April 15 to July 15. This will likely weigh on the short end of the curve. Three-month libor is already going up due to funding and credit concerns. The low was 0.74% on March 12, and on Friday it was nearly 50 bps higher at 1.20%. EDJ0 has been tremendously volatile and settled Friday at 99.14 or 0.86%. So that’s a spread of 34bps to Friday’s 3m libor. EDM0 settled 99.455, a spread of 31.5 to EDJ0. The low in EDJ0 in Feb was 98.325 and the high tick on March 16 was 99.635, an astonishing 131 bps. Makes the EDM straddle at 31.5 seem cheap, and the EDU0 9962.5^ at 24.5 seem ridiculous. EDM0/EDU0 futures calendar spread settled -15.0.
Treasury options have been pretty liquid. However, we’re now at the point where you can fit the June Five-Yr straddle inside the bid/offer of the June US straddle. I marked USM atm straddle 13’45/15’34 late Friday, or 1’53 bid/ask while the FVM 124.75^ settled 1’31. Volume will start to decline now as the forced moves become less frequent.
| 3/13/2020 | 3/20/2020 | chg | ||
| UST 2Y | 48.0 | 35.0 | -13.0 | w/I 33.3 |
| UST 5Y | 70.6 | 51.1 | -19.5 | w/I 54.3 |
| UST 10Y | 94.6 | 93.4 | -1.2 | |
| UST 30Y | 155.7 | 157.2 | 1.5 | |
| GERM 2Y | -87.0 | -67.7 | 19.3 | |
| GERM 10Y | -54.4 | -32.1 | 22.3 | |
| JPN 30Y | 32.7 | 42.9 | 10.2 | |
| EURO$ M0/M1 | -3.5 | -15.5 | -12.0 | |
| EURO$ M1/M2 | 26.0 | 9.0 | -17.0 | |
| EUR | 111.04 | 106.97 | -4.07 | |
| CRUDE (1st cont) | 31.73 | 22.63 | -9.10 | |
| SPX | 2711.02 | 2304.92 | -406.10 | -15.0% |
| VIX | 57.83 | 66.04 | 8.21 | |
https://www.zerohedge.com/markets/stocks-suffer-worst-week-lehman-despite-biggest-fed-bailout-ever
theguardian.com/business/2019/dec/20/why-wework-went-wrong
Paper
March 20, 2020
–One of the big catalysts sending stocks lower was the oil war announcement on the weekend preceding the March 9 open. Yesterday CLK0 settled 25.91, up 5.08 on the day and it’s building on gains this morning, as there is some chatter of a Russia/Saudi agreement to scale back production. Even Aussie$ has had a powerful bounce today, which is another market that has experienced a pervasive and violent sell off. Stocks are currently higher going into March expiration. Selling exhaustion appears to have set the stage for a generally positive day. However, one extremely negative underlying risk concerns funding pressures, on display in the euro$ curve yesterday. EDJ0, the front April ED 3-month contract, fell 16.75 bps to 99.01 or 99 bps, even with the FF target now at 0-25 bps. EDM0 settled down 11.5 at 99.35. This price action suggests that funding has gone the way of a roll of toilet paper, that is, scarce. The Fed is, of course, unrolling one program after another to make sure that funding issues are wiped away and markets don’t seize. For example, swap lines were opened to other central banks. I think the Fed will be able to contain funding pressure by whatever measures are necessary.
–There was heavy put buying for protection on the front end of the curve. For example, EDK0 9900/9850 put spread 5.0 was paid 100k covered EDM0 9834, 15 delta. This settled 4.75 vs 9935. One extreme trade was a buy of EDM0 9775 puts for 1.0, in size 18k (settled 0.5). This is a 2.25% strike based on 3 month libor in two and a half months. One area (of many) that is reflecting serious stress is the muni market. Friends involved termed this week as “historic” with a yield jump of some 300 bps. For a visual, check MUB, the largest muni etf, which has imploded from 118 earlier this month to a low of 100 yesterday. Chicago’s mayor Lori Lightfoot gave an address last night in part begging for a federal bailout. Everyone wants a federal bailout; Nikki Haley yesterday resigned from Boeing’s board because of that company’s request for a bailout. Good for her! Obviously, the deficit is going to explode, so the Treasury is now looking at selling 50 year bonds. Better hurry… Actually, it leaves the Fed as the monetization machine, and they won’t even have to pretend this time. Yes, I still have my 1922 Reichsmarks and yes, my 100 Trillion Zimbabwe notes.
I’m going off the rails on a crazy train – Ozzy
March 19, 2020
–Stocks puked after Ackman got on CNBC with a long alarmist interview. I later read that Gundlach covered the last of his stock shorts yesterday. Thanks Bill. Decent bounce into the close. ESM low yesterday 2262.00 but settled 143.75 higher than that at 2405.75.
–One program after another being rolled out to save the system. Latest Fed scheme is a money market lending facility. Stocks haven’t responded as much as I thought they might, but yesterday the curve steepened aggressively, as the two year yield rose 6 bps to 52 bps and thirties rose over 24 bps to 1.875. Tens gained 23.4 bps to 1.246%. New recent highs in both 2/10 at 72.4 and 5/30 at 107 bps. Vols exploded late in the day. I marked USM0 at 28 vol with the 168 straddle at 15’56 vs 167-31. This is also apparent in back midcurve straddles. Example, 3EZ 9900 straddle settled 67.0 vs 9894.5 in EDZ23, while 2EZ 9912^ settled 54.5 vs 9912.0 in EDZ22. 12.5 is a wide straddle spread given both expire on the same day. Another comparison: 3EM 9900^ settled 47.0 vs 9904. 2EZ 9912^ (same as mentioned above) settled 54.5 with six months more time. Back futures calendars have widened, but I would almost have to look at selling 3EM to buy 2EZ for 7.5. THIS IS NOT A RECOMMENDATION…JUST CRAZY PRICING.
–The dollar is taking no prisoners. New lows in India rupee, Korea won, Aussie, etc. Crude oil was crushed yesterday with CLK0 low at 20.52. There has been a $3 rebound this morning.
–EDM0 has made a new low of 9941 this morning though is slightly off that level now. The US will do everything to save banks, but the global system is much more precarious as displayed in FX across the globe. Consider these settles: EDM0 9946, EDU0 9956, EDZ0 9951.5, EDH1 9954. Now here are the 9900 puts: June 6.0, Sept 3.75, Dec 4.25, March 4.75. According to settles: -4x June and +3x Sept and +3x Dec for flat. THIS IS DEFINITELY NOT A RECOMMENDATION. The pricing everywhere shows that when there’s a crunch, it happens all in the front… whether it’s funding, VIX, oil, etc. EDM0 is simply a reflection of that.
PAWNBROKER: Man, that watch is so hot, it’s smokin’
March 18. 2020
–Everything is melting down this morning as the Fed is about to become the biggest pawnbroker in the world. They are about to take any collateral at all and turn it into cash for immediate use, including Aunt Bertha’s needlepoint chair. I was looking at the ultra-bond chart yesterday and it reminded of TSLA (with a lag). I was amusing myself, thinking that TSLA broke its 100 DMA at 506 and is still lower….that ought to project 191 for WNM0. Well, this morning the June Ultra-bond is down 11 at 200. Not so far-fetched. Trump is asking for a trillion dollar stimulus, while the Fed is on a 24-7 run of printing cash. What difference does credit rating make in that environment? What value, cash?
–April crude this morning just above $26/bbl while I see Sept at 30.23. Pretty darn good returns if you can take the spot and store it, looking in the forward. But what is the world going to look like in September?
–Italy banned short selling and the US is likely close. A loss of 50% in SPX would be 1697; I believe the loss in the crisis was 57%.
Lower Bound
March 17, 2020
–DJIA was down 13% yesterday, with accelerated sales after Trump advised that disruptions could go on until August. SPX fell 12%, with the total loss from the Feb high of 3393 at 30%. Yields fell significantly after the Fed’s Sunday night cut to ZIRP, with tens down 23 bps to 0.718% but 2’s only down 12.2 bps to 0.358%. In dollars, reds +11.0 to 99.556 (avg), grns +16.75 to 99.355, blues +18.875 to 99.207 and golds +23.0 to 99.094. A dramatic FF cut is typically a steepener, but the market appears to believe that the Fed is out of bullets in the front end, therefore support operations will occur in longer maturities.
–Companies that diluted their balance sheets by taking on debt and buying back shares on the wings of previous QE ops are now on tenuous ground. Perhaps financial engineering will be much less prevalent going forward. In any case massive stimulus globally should make people think twice about buying duration. I would rather own 2’s at 37 bps than pick up an additional 36 bps for ten years. By the time twos mature and the virus is in the rearview mirror, tens will likely have MUCH higher yields.
–That sort of sentiment is on display in euro$ options. For example, 0EU0 9962.5 straddle settled 27.5 vs EDU21 at 9959. However the atm 3EU 9925 straddle settled almost twice as high at 54.5 vs EDU23 at 9922.5. Both expire on the same day. It makes some sense of course; the strike price of 9962.5 is 37.5 bps and the blue is 9925 or 75 bps, so the strike is twice the yield. However, it appears to indicate that the US market respects the idea of a zero bound, and intuitively prices for a steeper curve.
–Peak prices on the curve are now EDU20 at 9967.5 and in FF’s July20 thru Oct20 all settled 9992. So dollars have roughly 1/4% premium to FF; this, as large banks are getting ready to tap the discount window in an effort to make it a more mainstream policy tool.
–Treasury options functioned pretty well yesterday. TYM 138 straddle was sold at 4-06 down to 4-01 and settled 3’60 vs 137-31. Mid-market pre-open was around 4’15. Canada March BA contract matured yesterday. On Friday afternoon it was 98.955. Monday’s final settle was 98.632, a difference > 30 bps. Something to ponder with respect to front end vol sales…
A soothsayer bids you beware the ides of March
15-March 2020, Weekly comment
Now let it work. Mischief, thou art afoot,
Take thou what course thou wilt! -Mark Antony
I just couldn’t help myself in using Julius Caesar in this week’s note as markets have endured three and thirty wounds in the past week. I know, not particularly original. While stocks staged a spirited rally on Friday afternoon, underlying dislocations and injustices are continuing, one after another. I am just going to mention a few of them. People far more knowledgeable than me are writing about the intricacies, so I am only providing a couple of charts below. My overwhelming thought is that there is a lot to play out, and it’s going to get much worse from a liquidity standpoint.
The magnitude of the recent move has been breathtaking with SPX down 27% from high to low in just three weeks. On a closing basis, SPX was -8.8% this week. Treasuries had their largest weekly ranges ever. Ten year yield jumped 24 bps on the week to 0.946% and thirties 35 bps to 1.557%. The two year was down 1 bp, so 2/30 spread gained 36 to 108 bps. Every government and central bank is trying to mitigate the fallout of COVID19. “Whatever it takes… And believe me, it will be enough.” The Fed announced massive $1.5T term repos on Thursday, with the FOMC meeting this Wednesday. Fed fund futures are essentially projecting a cut to zero, with the April contract closing at 99.84 or 16 bps, vs current Fed Effective of 1.09% to 1.10%. One year out, FFJ21 closed at almost the same price, 99.845. I am not saying it’s correct, but the FF market is currently implying that the Fed will be at zero for a year. However, there is a lot more turmoil in the euro$ curve. April ED FELL 15 bps on Friday as credit and funding concerns gripped the market. The week to week change in EDJ0 was actually up 8 bps in price to 99.28, but the week to week change in FFJ0 was +35 bps, from 99.49 to 99.84. The forward one-year calendars in dollars all made new recent highs. For example, EDH21/EDH22 settled 25.5, up 16 from the previous Friday. At the end of February all near one-yr ED calendars were significantly negative, now they are all positive save the front EDM0/EDM1 at -3.5 from a recent low of -30.5 on Feb 25.
The front June EDM0 contract is reflecting funding concerns. While spreads have blown out, most are nowhere near levels seen in the 2008/2009 crisis. For example, when the market perceived Fed cuts in 2007, (albeit from a much higher initial FF rate) the red/gold ED pack spread surged from 25 in 2007 to 225 in early 2008. Ultimately, the spread topped at 300. Currently, red/gold pack spread has moved from a bit over zero in 2019 to its current level over 55. This week it gained 35 bps. Corporate bond spreads have jumped, but again, nowhere near 2008 when BBB spread nearly hit 800 bps. St Louis Fed’s site has the BBB option-adjusted spread at 277 bps, around the high of the EM/energy blow-up of 2016. As a rough proxy of libor/ois I look at a rolling spread of the 2nd ED quarterly to the 5th FF. The spread has currently surged from just above zero to 39 bps, around where it reached in last year’s mid-Sept repo ‘crisis’. In 2008 it reached 150 bps. Of course, bank shares have collapsed with some of the larger European banks, DB and CS for example, making all-time lows.
The VIX has, of course, surged, hitting a high of 77 but not quite reaching the crisis high of near 90. The MOVE index (above) is 163, about the same magnitude of gain as it had in late 2007, when it then fell back to 100, before it surged to its ultimate high in late 2008 of 264. (MOVE is weighted index of 1-month normalized vol over the treasury curve).
One area where spreads did exceed highs in 2008 is munis. The VanEck high yield muni ETF experienced its biggest drop ever. Of course, the markets did not take kindly to Lagarde saying it was not the central bank’s job to close spreads. Tough love may have worked in the old job Christine, but not in this one.
The below chart is gold/silver ratio, at an all-time high, and that’s with GCJ0 having plunged 9.3% this week.
I have a friend from CME floor days, who in the old vernacular, says there’s no one standing in there to keep this stuff in line. He means euro$ spreads and butterflies, and he’s referring to the screens, even though in the old days we would have meant big market makers standing in the pit. All I can say is, the liquidity is drying up; the old boundaries don’t necessarily have to hold.
A trade, sir, that, I hope, I may use with a safe
conscience; which is, indeed,
sir, a mender of bad soles. -Cobbler answering Marullus with a
homophone (soles/souls)
In the bigger picture, government budgets are going to explode. Central banks will be pressured to monetize debt and eventually reconsider the ‘trillion dollar platinum coin’ solution.
| 3/6/2020 | 3/13/2020 | chg | ||
| UST 2Y | 48.8 | 48.0 | -0.8 | |
| UST 5Y | 55.9 | 70.6 | 14.7 | |
| UST 10Y | 70.3 | 94.6 | 24.3 | |
| UST 30Y | 120.4 | 155.7 | 35.3 | |
| GERM 2Y | -85.8 | -87.0 | -1.2 | |
| GERM 10Y | -71.0 | -54.4 | 16.6 | |
| JPN 30Y | 31.1 | 32.7 | 1.6 | |
| EURO$ M0/M1 | -8.5 | -3.5 | 5.0 | |
| EURO$ M1/M2 | 10.5 | 26.0 | 15.5 | |
| EUR | 112.86 | 111.04 | -1.82 | |
| CRUDE (1st cont) | 41.28 | 31.73 | -9.55 | |
| SPX | 2972.37 | 2711.02 | -261.35 | -8.8% |
| VIX | 41.94 | 57.83 | 15.89 | |
http://shakespeare.mit.edu/julius_caesar/full.html
Quite a week
March 13, 2020
–DJIA fell almost exactly 10% yesterday, with SPX -9.5 and Nasdaq -9.4%. Comparisons were made to 1987, as this was the largest one-day sell off since then. Let me just mention a couple of other things from 1987. At that time, the FF rate was 7.25%. In October 1987, Greenspan cut 50 bps to 6.75%, and had also put out a statement on Oct 20: “The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” In February of 1988, the Fed cut another 25 to 6.5%. Later in 1988 it was back to raising rates to fight inflation. How different today is. The Fed Effective is 1.09% and April FF yesterday surged another 13.5 bps to 9984, or 16 bps. In 1987, the hot investment product was ‘portfolio insurance’, as I recall it, this spiffy product was a system of buying puts and then buying more puts if the market fell. It backfired. Now the market has been conditioned to low rates and there is simply no question that the Fed is ready to provide liquidity with every little wiggle. There is no comforting shock effect to a statement like 1987, because the size and flows are overwhelming with no cushion provided by high rates. In any case, the Fed yesterday announced massive repos, $1.5 T total in one- and three-month terms, and extended the $60 billion monthly QE out to longer maturities. Stocks were relieved…for all of about 15 minutes, and then made new lows.
https://www.newyorkfed.org/markets/opolicy/operating_policy_200312a
–Signs of stress and dislocations are everywhere, both in markets and in daily life. Trump’s speech on Wednesday night heightened the gnawing uneasiness that has gripped the public’s consciousness. In markets, there have been several articles about the treasury bond basis becoming unhinged; there’s a link below (thanks TH). In my opinion, it all comes down to one thing, the search for yield compressed everything to unreasonable levels. No yield means that clever people come up with all sorts of ideas to squeeze out a few incremental bps, whether that’s selling vol or engaging in highly levered strategies on ‘stable’ relationships. Then you wrap it all up in a fancy name. ‘Relative value’. That’s when one thing goes up and the other goes down and you’ve got it on the wrong way.
–The curve is steepening: as mentioned, April FF were up 13.5 bps while the Ultra Bond WNM0 settled -2’27 to 217-17. 2/10 made a new recent high at 37.3 bps, up 4.5 on the day. The red/gold pack spread in dollar jumped just over 9 bps to end at 52.5, also a new recent high. Straddle levels exploded yesterday, esp on longer maturities. On Wednesday, 0EM0 9950 straddle settled 27.5 vs 9955.0. Yesterday, the 9962.5^ settled 27.0 vs 9958.0. However, on Wednesday the blue 3EM0 9925^ settled 40.5 vs 9921.5. Yesterday the contract settled unch’d at 9921.5 and the straddle leapt 5.5 bps to 46.0. The USM0 at straddle went from 12’60 to 14’28.
–As mentioned the other day, the EDM0 9950 straddle is now worth more than the EDU0 9962^ with 3 months of extra time value, 26.5 to 23.0. Downside puts which were thought to have no value suddenly came to life. For example, EDM0 9825 puts traded 1.5, more than 125 bps out and the center strike of the massive put flies that had been accumulated (9837/9825/9812 flies).
–A week ago, FFJ0/FFJ1 one-year spread was around -28, with the thought of incremental additional easing over that year. Yesterday it settled -1.5. The market is demanding eases now. Not later.
Dominoes
March 12, 2020
–A Bloomberg headline says it all: ‘Trump’s error-laden foreign virus speech has investors spooked’. Travel between US and the EU will be curbed. Companies are tapping credit lines to stay afloat. CME will close trading floor at the end of Friday. NBA suspends season. Stocks are at new lows this morning.
–Yesterday’s session featured a rise in treasury yields. I marked cash tens up 5.2 bps at 82 bps and 30’s up 6.8 at 1.317% at futures close. However, the basis became unhinged with TYM0 DOWN 7.5/32 at 137-125, USM0 UP 30 at 180-17 and WNM0 DOWN 31 to 220-12. The cash bond 2.0% of 12/15/50 went from Tuesday’s mark at futures settle 118-05+ to yesterday’s 117-01, while futures went the other way, USM 179-19 on Tuesday to yesterday 180-17. Just another dislocation that is causing severe pain. 30-year bond auction today. There is and will be a major decline in liquidity in rate products.
–All euro$ calendars are surging to new highs. Red pack (2nd year) closed UP 3.625 bps and golds (5th year) closed DOWN 3.75. Red/gold pack spread which had been closely mirroring 2/10 made a new recent high of 43.375 bps. 2/10 was up 4.5 bps to 32.8 (recent high was 35.4). April FF made a new high settle of 9970.5, but are up another 13.5 at 9984 this morning, just 16 bps. I thought the Fed would be able to hold out until next week to ease at the (teleconferenced??) FOMC, but it might happen today.
