Steeper end to 2019. More to come?
January 2, 2020
–China cut reserve ratios for large banks by 50 bps to 12.5% yesterday, giving a jolt to equities to kick off the new year. Protesters have apparently pulled back from the US Embassy in Iraq, though that situation could easily flare up again.
–Friday featured slightly higher yields in a session where the big trade concerned liquidation of long TYG 129 calls. When all said and done, TYG 129/130c spread declined 84k in both strikes (the calls settled 17 and 5, so cs 12s vs 128-135). TYH0 lost 30.5k in open positions, a bit more than would be indicated by the exit of the 21 delta call spread. The ten year yield at the early floor close was 1.907%, up 1.4 bps on the day. New highs posted once again in many curve measures. 2/10 ended 2019 at its high of 35.2 bps. +2.6 on the day. Reg/gold euro$ pack spread settled 33.0, +2.125 bps, and 5/30 at 69.5, +2.7 on the day. One somewhat interesting note: the back end of the euro$ curve (and sterling and euribor for that matter) is where the steepness is. For example, EDH21/EDH22 (red/grn March) is 5.5 bps, but EDH22/EDH23 closed at a new high of 12.0. In sterling, L H22/H3 is 8 bps, and in euribor H22/H23 is 15.5 (ERH21/H22 is 12.0).
–Lows so far this morning in USH and WNH are 155-05 and 180-13, holding early November lows so far, of around 155-00 and 180-00.
–One other trade of note Friday was a new lottery ticket buyer of 30k 0EG 9887/9937cs for 1.0, ref EDH21 9844.0s. Keeping with the steepening theme, buying short maturities, selling long.
Libor setting likely to converge DOWN to future’s rate
December 31, 2019
–Happy New Year!!!
–First a bit of local news. Illinois continues to lose population for the 6th year in a row, down 1.2% in the past decade, as new taxes and fees continue to be imposed in an attempt to stem the tsunami of upcoming public pension fund failures. On the other hand, recreational weed will be legal in the new year. That ought to fix it.
–Big moves yesterday included new highs in many measures of the curve. 2/10 hit a new high for the year at 32.6, up nearly 4 bps. 5/30 gained 3.4 bps to 66.8 (hi of year has been 80) and red/gold euro$ pack spread was up 3.25 to 30.875. Front euro$ contracts rallied as the turn is now in the rearview mirror. Yesterday’s 3-month libor setting which was past the turn (T+2) was 1.90938%, suggesting significant convergence to EDF0 which settled +2.5 at 9818.5 or 1.815%. In this case, it appears as if the libor setting is likely to drop to meet the futures price rather than the other way around. I draw this conclusion both because EDF0 is currently even higher at 9819.5 this morning, and because there is selling of the EDH0 9825 straddle at 7.5. EDF0 settles January 13.
–Expectations of ease next year are being wrung out of the market. FFF0/FFF1 settled -18.5. High print has been -16.0 recently, and it traded -17.0 yesterday, so there is less than one 25 bp cut priced for the year. There seems to be pervasive concern that stocks could see a pullback from these levels. Even yesterday’s modest selling in equities sparked a bid from lower levels in fixed income.
Removal of liquidity insurance
December 29, 2019
The driving factor of Q4 appears to have been the extraordinary growth of the Fed’s balance sheet and tremendous liquidity injections provided by the Fed’s repo operations since the mid-September funding scare. In the last quarter SPX gained around 8%. I had seen a clip on twitter that said the increase in the Fed’s balance sheet in Q4 was almost identical to net issuance of treasury debt over the same period. Pure coincidence. right? I didn’t check the veracity of that claim, but the balance sheet did rise by >$400 billion in Q4. Given that it’s an election year, it’s hard to believe that the Federal Gov’t will pare back deficit spending. So the main question going forward, as we get past issues concerning turn-of-year funding, is: Will the Fed now be able to remove some of the insurance liquidity, and how will markets react?
I don’t know if one can use TSLA as a gauge for liquidity driven flows, but in Q4 it nearly doubled from 241 on Sept 30 to 430 on Friday, sparking a gain of around $34 billion in market cap. In 2019, SPX gained 32% and the Bloomberg Commodity Index (BCOM) was up 5.7%. As the chart below of SPX divided by BCOM shows, glaring outperformance of shares over commodity inputs continues uninterrupted. (Doubled over the five year time period shown). This chart rises almost as consistently as Madoff’s returns.
SPX/BCOM
I’ve done a bit of work on open interest levels in futures over the past year. Precious metals have recently been in the spotlight, partially due to the meteoric rise of palladium, and open interest in Gold futures (GC) continues to make new record highs. I generally think that gains in open interest confirm the major trend. However, given the myriad of gold-related derivative products, I am a bit hesitant to draw that specific conclusion. The suspicion I am beginning to harbor is that, like the repo market, for which liquidity and rate were taken for granted in spite of huge growth of assets to be funded, there may be a situation where the size represented in gold derivatives dwarfs the physical, causing a violent re-pricing.
Here are a couple of charts showing futures prices (white) with aggregate open interest (green). The top is a rolling front gold chart over the past year, while the lower chart is EDZ0 as a representative ED futures contract over the past four years. Two things to notice on the ED chart. 1) OI peaked in early 2018, after the tax package conjured thoughts of consistent growth acceleration coupled with Fed hiking, which necessitated hedging. 2) After the EDZ19 expiration, aggregate open interest has tumbled back to 2016 levels. The market is becoming convinced that no changes in the FF target are likely over the medium term, and that time frame certainly encompasses this election year.
GC1 (white) Aggregate Open Int (green)
EDZ20 (white) Aggregate Open Int (green)
A few other changes are going on as well. In what may be looked back upon as a key inflection point, the collapse of WeWork seems to have changed sentiment away from unlimited funding for loss-making enterprises in the hopes of dominating market share, to more efficient operations focused on generating (gasp) profits. Second, the hike by the Riksbank this month to zero is a sign that negative rates have lost their allure. Finally, the dollar index, which has been in a gently rising uptrend for the past year and a half, now seems to be in the early stages of making lower highs and lower lows. On the whole, these developments would appear to support higher inflation expectations. 1) Shift away from buying cash-burning market share to buying profits, 2) Negative rates encourage zombies; even a small hurdle could clear out some dead wood, 3) A weaker dollar raises the prices of imports and creates better conditions for domestic pricing power.
What are the possibilities regarding a potential ‘normalization’ of liquidity post-turn? The stock market will likely have a negative reaction. In terms of bonds, the prospect of less certain funding might also stifle some enthusiasm. Though commodities could also be pressured, they will likely outperform stocks as a class.
What if the Fed finds that it can’t step back from repo operations due to fears of financial dislocations? In this case, stocks could see a more aggressive ‘melt-up’, but the dollar would likely fall further and gold would benefit.
It seems as if gold might be the safest harbor no matter was happens in the beginning of 2020.
OTHER MARKET/TRADE THOUGHTS
With Friday’s expiration of January treasury options, the large Jan/Feb call calendars are now left with long Feb calls. In TYG 129c there are 208k open, settled 25 vs 128-21. FVG 119.25c have 53k open and settled 6 vs 118-21. While there has already been some higher strike Feb call selling against these core longs, I would guess we’ll see a bit more of that this week.
Persistent skew in near ED’s. EDU0 settled 9837.0. Equidistant 9800p settled 0.75 and 9875c 4.25. There are large longs in 9875 and 9887 calls. The puts are considered trash because there is no way the Fed will ever hike (right?). That’s NOT to say that the curve can’t steepen. EDU22 settled 9836.0. In the midcurves, 2EU 9800p settled 8.25 and 9875c settled 9.75. More deferred contracts are much more open to a range of outcomes.
On Friday, pressure on near euro$ contracts abated. EDF0 jumped 3.5 bps to 9816.0 and EDH0 up 2.5 to 9825.0. Friday’s 3-month libor setting was 1.9446% while EDF0 closed 1.84%. These prices still reflect fairly high turn pressure; by the end of this week I would expect EDH0 will add to Friday’s gains. With EFFR at 1.55% and EDF0 9816.0, the spread is 29 bps, still a bit high given lack of credit concerns.
On Friday, the first April options traded in TY. TYJ 129.5/130.5cs traded 16, 500x, settled 15 vs 128-06 in TYM0. These options expire March 27. There are currently NO open April options in FV. With the roll-off of January, April and even June options should begin to see more activity. Super-Tuesday in the US is March 3rd, so if election outcomes color expectations of yields, then April options are worth tracking.
| 12/20/2019 | 12/27/2019 | chg | |
| UST 2Y | 162.7 | 158.5 | -4.2 |
| UST 5Y | 172.7 | 167.6 | -5.1 |
| UST 10Y | 191.5 | 187.2 | -4.3 |
| UST 30Y | 234.4 | 231.0 | -3.4 |
| GERM 2Y | -63.4 | -63.0 | 0.4 |
| GERM 10Y | -25.2 | -25.6 | -0.4 |
| JPN 30Y | 44.6 | 43.2 | -1.4 |
| EURO$ H0/H1 | -18.5 | -19.5 | -1.0 |
| EURO$ H1/H2 | 5.5 | 4.0 | -1.5 |
| EUR | 110.80 | 111.76 | 0.96 |
| CRUDE (1st cont) | 60.44 | 61.72 | 1.28 |
| SPX | 3221.22 | 3240.02 | 18.80 |
| VIX | 12.51 | 13.42 | 0.91 |
Public places and mansions
December 25, 2019
Not my normal topic, but a New Yorker piece got me thinking….
The other day I was walking down Jackson Blvd to have coffee with a friend near the CBOT. Jackson borders Willis (formerly Sears) Tower on its south façade. They’re doing a massive renovation project on the building, complete with all sorts of amenities for the consumer crowd: tourists that want to experience (for some reason) standing in a plexi-glass box jutting out from the 103d floor, and office workers on lunch breaks. There’s a Shake Shack (more on that at another time), and, on an extension of the southeast corner, what appears to be a huge mezzanine rooftop pavilion. I am not positive about its use, but as I walked by I was thinking, wow, another open-air rooftop. In Chicago, you get about 3 months of use out of open-air spaces…not including Christmas Day, where the temp today is pushing 55 degrees.
To the south of the building where I work, sits the old post office, an absolutely massive building with a tunnel at its midsection for the east/west passage of Congress Street. There too, an extravagant rooftop park is being constructed. From our south window we can watch the progress, but here’s a rendition of the final product.
Nice amenity. I suppose these days it’s almost a necessity to draw tenants. That was really the extent of my thoughts, until I read this article in the New Yorker.
Here are a couple of excerpts:
Taxpayer-funded, corporately branded, suspended above the homeless, the park is an irresistible metaphor for the city’s socioeconomic tensions. It also feels like a bid, or a prayer, for a certain vision of its future.
But it wasn’t until my fourth visit that I noticed the security cameras. They were perched on gray-and-white poles that studded the park’s perimeter. “It’s like ‘Minority Report,’ ” the friend I was with remarked, looking up. In a way, the cameras completed the picture: Salesforce Park as a model for the rest of San Francisco—vertical, expansive, ecologically minded, expensive, sponsored, and surveilled.
“This has a little bit of a utopian element to it.”
“Suspended above the homeless”. In cities, we are now building our safe, (semi)-public suburban parks upward. For all of the righteous indignation of the current generation about social justice and equality, developers seem to have concluded what’s really necessary is beautiful, insulated, and isolated spaces to attract the new breed of corporate worker.
My second thought regarding social justice and real estate comes from a Martin Armstrong piece about real estate sales volumes, which confirm the migration from high to low tax states. From California and New York/New Jersey to Texas and Florida. YTD CA real estate sales volume -3% while TX +4.1%. Connecticut -5.5% ytd.
https://www.armstrongeconomics.com/real-estate/economy-real-estate-mass-migration/
Further, Manhattan data shows large declines, down 6-16% last quarter, partially as a result of the increase in the “mansion tax” which went into effect July 1, 2019, with deals rushed to completion before that date to get in under the wire. CNBC reports that “the average sale price for a Manhattan apartment fell 14% in Q3, according to a report by Douglas Elliman and Miller Samuel. That was the steepest drop since 2010…” From the same piece, “The average price of a Manhattan apartment is still not cheap- falling to $1.7 million.” Mansion tax has a nice elitist ring to it. I mean, how many dwelling units in Manhattan could fall under a Mansion Tax? Apparently quite a few if the average price is $1.7 million. Here’s a table of the tax:
- 1.00% for purchases $1,000,000 to $1,999,999.
- 1.25% for purchases $2,000,000 to $2,999,999.
- 1.50% for purchases $3,000,000 to $4,999,999.
- 2.25% for purchases $5,000,000 to $9,999,999.
- 3.25% for purchases $10,000,000 to $14,999,999.
- 3.50% for purchases $15,000,000 to $19,999,999.
And here’s a listing of a Manhattan apartment at 20 Pnie for $1.799m. Nice place. But not what I would consider a “Mansion”.
https://streeteasy.com/building/20-pine-the-collection/1602
When I think of a Mansion, it’s more like the Duke Brother’s home in Trading Places.
Wherever you live, Merry Christmas and good cheer!!! Don’t spend it all in one place.
In: Eurodollar Options
COT and Euro$ open interest
December 24, 2019
–Yesterday I saw a couple of postings related to the large drop (700k) in spec longs in euro$’s from the last Commitment of Traders (COT) report. My suspicion is that these changes have to do with 1) the Dec FOMC which indicated that the Fed is on hold for the foreseeable future, and 2) the expiration of December midcurves and futures. Below, I created a chart using a representative futures contract, EDZ20, with AGGREGATE OPEN INTEREST for all ED futures contracts (green line). Total OI peaked in 2018 near 18 million as the Trump tax package was enacted. Since then open int has dropped with every expiration, without being replaced. Current OI is just under 11 million, a level not seen since Q2 2016. The last little peak was in September at over 13.5 million; since that time implied vol imploded as well.
–New recent highs in near calendar spreads. EDH0/EDH1 and FFF0/FFF1 both settled -16.0, more evidence that the market has shaved odds of any ease over the next year. However, calls are still bid to puts. For example, 0EH 9812p settled 1.5 while the 9862c settled 3.5 vs 9838.5.
–Yesterday there was a buyer of 50k EDH0 9837/9850c spd 0.65 (synthetic). Settled 0.5 ref 9822.5. Yields edged higher on light volume, with tens +1.6 bps to 1.931%. On the euro$ strip, reds were weakest, closing -3.5 (greens -3.375, blues -2.875 and golds -2.25).
–Five year auction on this holiday shortened session.
Merry Christmas!
Market pricing supports further steepening
December 23, 2019
–From late Sept until Friday, the curve has steepened. German 2/10 bottomed at 14 bps in late Sept, and ended Friday at 38, a gain of 24 bps. In the US, 2/10 had bottomed in late August at -4, but from the time of the German low to now, US went from +1 to current 29, a gain of 28 bps. As the German curve flattened thru out the beginning of the year, it dragged EUR with it; now the euro is trying to rally, but if the US curve is getting relatively steeper, it will likely be difficult for the the euro to gain much upside traction.
–Friday was quiet with tens gaining 0.7 bp to 1.908%. Euro$’s were a bit weaker, with red pack the under-performer, closing -2.125. Two-year treasury auction today, followed by 5’s tomorrow and 7’s Thursday.. While the front white pack to reds as a spread prints -9.25, everything from reds back is positive. Red/green (2nd to 3rd) settled 7.875, green/blue (3rd to 4th) 9.875 and blue/gold (4th to 5th) 10.0. What is somewhat interesting is that the curve gets steeper further back. This is also reflected in nominal midcurve straddle levels, where greens are higher than reds and blues higher than greens: 0EM 9837.5^ 31.0s, 2EM 9837.5^ 36.5 and 3EM 9825^ 37.0. I would think this should correspond with increased term premium.
–January treasury options expire Friday, TYF0 128.25 straddle settled 26/64’s. One other note, FFF0/FFF1 one-year Fed fund calendar spread settled -17.5, up 2 bps on the day. As trade tensions edge toward easing (China cut tariffs this weekend), the market is pricing less of a chance for the Fed to cut next year.
TGIF
Dec 20, 2019
–At futures’ settlement, yields were marked slightly lower on the day, with tens down 1.2 bps at 3:00pm to 1.908% vs TYH 128-10. However, the last two hours of trade saw TYH fall to 128-05, and the current price is 128-00. Curve continues to grind to new highs, with 2/10 at 29, and red/gold pack spread is at the exact same level (+1.125 on the day). Both FFF0/FFF1 and EDH0/EDH1 settled at -20, leaning towards one rate cut next year. Vols remain under pressure going into the holiday shortened week.
–Interesting note on Reuters that the US is planning to stockpile rare-earth minerals for military applications. I’m pretty sure that rare earths aren’t a component in CPI, but a general psychological shift toward hoarding, should it become more pervasive, may tend to have an influence on prices in general. In some ways it’s also probably a net negative with respect to the arms race. Not related, but President Xi is skipping the Jan 21-24 Davos confab, dashing hopes for a meeting with Trump.
–Potential for a washout in fixed income today. Yesterday’s bounce was typical against previous lows from mid-November. However, it fizzled. There is likely to be some position squaring in front of the holiday, and Jan treasury options expire a week from today (92k open in Jan 128 puts). If I’m long fixed income and taking next week off, I might find it prudent to pare back.
–I had never heard of this, but a friend sent me a note on the Rydex ratio, unsurprisingly pointing to more froth in equities currently than during the dot.com episode. The Rydex ratio measures assets in bear and money mkt funds relative to bullish and sector funds…so it’s not subjective. https://www.marketwatch.com/story/if-you-buy-into-warren-buffetts-advice-to-be-fearful-when-others-are-greedy-then-get-ready-to-be-full-of-fear-2019-12-19?mod=home-page
No political agreement, but market signals agree: Curve is steepening
December 19, 2019
–With the impeachment vote, the House was able to send a really important message to Trump that they just don’t like him. Stocks remain near all-time-highs this morning, and bonds are lower; the market has concluded that more gov’t stimulus is likely to result.
–Great interview yesterday with Stanley Druckenmiller and BBG’s Eric Schatzker. Druckenmiller is: Constructive equities because of the fiscal, monetary and employment backdrop. Long equities, short bonds, long some commodities (include copper) long commodity ccys.ES: Central banks are determined to get inflation above 2%. “Does inflation matter?”
SD: There are 14 recognized measures of inflation, 12 are above 2%. The Fed’s preferred measure PCE is 1.7%. The Fed is taking tremendous stability risks with these policies. Finally, “You cannot have capitalism if you don’t have a hurdle rate for investment.”
–Regarding the long copper position, note that yesterday BBG updated a note on Gundlach’s indicator of the copper/gold ratio as a correlated leader of the US ten year yield. I posted an updated chart on twitter…both pointing higher.
–In terms of market action yesterday, new recent highs in several measures of the curve. Most importantly, 2/10 made a new high for the year at 28.7 bps, up 3 on the day. Red/gold pack spread also at a new recent high at 27.875 (this is not a new high for the year, that was at 43 in June). Surprisingly, there is no reach, YET, for puts. I would make another quick observation that ERH21/ERH23 posted a new high at 24.0. Almost everything is pointing in the same direction. Hard to ignore.
–Large action in ten year options was a roll down of TYF/G 130 call calendar into the 129 call calendar. TYF 129c settled 3 and TYG 129c 18 vs 128-055. Jan options expire one week from tomorrow. In euro$, buying of EDH0 9825/9837/9850 c fly for 1.25. There is relentless long accumulation of EDU0 9875c. Yesterday, +30k EDU0 9875/9900cs vs 9812.5p. This package settled flat, 4.50, 2.25 and 2.25.
–Finally, today Sweden’s Riksbank ended five years of negative rates by hiking to zero.
Markets ignore impeachment
December 18, 2019
–Stocks are hanging around all-time-highs in front of the impeachment vote. Interest rate futures are quiet, with little change in yesterday’s close. 2/10 squeaked to a new recent high of 25.6 with twos -1.2 bp and tens -0.2 to 1.887%. FedEx reported ‘horrendous’ results as a result of global trade issues and its more clear-cut problems with Amazon. Seems like it’s company specific, as the UPS chart holds well above the previous peak in April, while FDX is down over 20% from the high in April.
–EDU0/EDZ0/EDH1 butterly settled +4.5, the highest of any three month fly on the curve. This is, of course, due to end of year pressure reflected in the EDZ0 contract, with EDU0/Z0 -1.0 but EDZ0/H1 -5.5 (prices 9837.0, 9838.0, 9843.5). Back in September, when the repo ‘crisis’ was percolating, this fly traded to 8.5. I would attribute the recent pullback in the fly to lessened repo fears overall as the Fed shows that it’s not afraid to flood the system with liquidity, but there are also election considerations. Dallas Fed’s Kaplan was interviewed yesterday and he said that the upcoming election wouldn’t affect his thinking about rate moves (he’ll be a voting member on the FOMC next year), but in my opinion it clearly will affect the Fed’s actions, which is to say, a lack of action. Pent up moves for short rates in the first half of 2021?
–The Hill has an op-ed piece on Fed gov’t spending ‘Will the fed’l govt’s non-stop spending binge continue?”https://thehill.com/opinion/finance/474667-the-federal-governments-nonstop-spending-binge-continues
Somewhat interesting in relation to Kaplan’s tv appearance… he said he expected sluggish global growth, weaker manufacturing, but solid support from consumer spending. He didn’t mention government spending at all, but it has clearly been one of the main economic props, and Trump is instructing staff to look for spending cuts…after the election.
Misfit toys
Dec 17, 2019
–The exuberant rally in GBP has reversed, appropriately leaving an island top on the futures contract, as a hard stance on Brexit negotiations looms. Any chance of an equally hard reversal in US stock index futures? Probably not…
–Rate futures tumbled yesterday with the ten year note yield up 7 to 1.889%. 2/10 edged to a new recent high at 24.6. In dollars, reds fell 8.125, while greens and blues were down 9.0. Implied vol continues to be blanketed, though there was a large buyer yesterday of 0EF0 9837/9850 strangles for 6.5 in 35k. Underlying is EDH21 which settled 9843.0, expiry is Jan 10. So breakeven is 9856.5 (recent high earlier in the month is 66) and 9831 (recent low was right at the 9837.5 strike). I marked TYH 128.5^ at 1’43, 3.8 vol, a new recent low, even though 7 to 8 bps moves are becoming commonplace in the contract.
–April FF settled 9846.0, indicating almost NO chance of an ease over Q1. FFF0 settled 9844.5 and FFG0 9844.0. The lowest one-year euro$ calendar is still the front EDH0/EDH1 which settled -18.0, right at the recent high. Stocks sit near all-time highs, the dollar index is showing signs of softening, the CRB commodity index is on the verge of an upside breakout, ten year inflation-indexed note to treasury spread notched a new recent high at 174.3 bps. On paper, the possibility of a hike should be every bit as likely as an ease. But paper has a way of catching fire, and at the first whiff of smoke the Fed comes in with bells and sirens and a lot of water. For example, EDU0 9875/9887.5 call strip was bought 20k yesterday, settling 8.5 (5.0 and 3.5) vs EDU0 9837.5. The equidistant puts, 9800 and 9787.5, settled 1.0 and 0.75. Puts are like the rejects on the island of misfit toys. Lonely and unloved. For now. But maybe someone’s going to want a Charlie-in-the-box someday.
