More blue puts

October 9, 2020

–Yields eased yesterday with tens down 1.9 bps to 76.4 as the treasury wrapped up the 30y auction.  New recent high in ten year note to tip breakeven spread at 172 bps (long term inflation expectation).  The high mark of the spread according to my data was on Jan 2 at 180.5, so it’s been nearly a full recovery from the low set in mid March of 50 bps.  Amazing what a few trillion $’s can accomplish.  Also, EDZ0 to FFF1 spread made a new low settle of just 16.5, as turn is further squeezed out.–Seller yesterday of 30k EDU22 at 9970.5.  Appears to have been an exit as that contract had the biggest change in open interest, falling 17k.  US (bond) vol was crushed yesterday.  On Wednesday, USX 174 straddle settled 2’22.  On a block trade early yesterday morning, there was a seller of 5k USX 174p at 1’12 cov 173-26, equivalent to 2’12 in the straddle, and by day’s end the settle was 2’04 with two weeks until expiry.  USZ straddle fell from 4’50 to 4’38.  –In a continuing theme, there was a lot of put buying in blue midcurves, most notably 3EH or blue March.  These options expire 12-March, 2021 on the underlying contract EDH’24 which settled 9942.5.  Not that it much matters, but the March FOMC meeting is on the 17th.
Large trades:
3EH1 9937/9925ps 3.75 paid 20k
3EH1 9937/9912ps vs 9975c 2.5 paid 5k
3EH1 9937/9900ps 8.0 paid 10k

Settles, EDH4 9942.5
3EH 9937p  9.75s open interest +26.5k
3EH 9925p  6.25s open interest +14.5k
3EH 9912p  4.00s open interest -750
3EH 9900p  2.50s open interest +9335

–Stocks higher this morning, with gold and silver also higher, swept up in the draft of bitcoin’s strength yesterday.
–Light news today.  Columbus Day Monday.  No, you can’t have the day off, because you’ve toppled all the statues.

The year of Unintended Consequences

October 8. 2020

–Bear steepener yesterday.  All curve measures made new highs, 2/10 at 62.8, up 3.5 on the day (double top this year 69/70).  5/30 at 124.8, up 2.2.  Red/gold pack spread 51.75, up 3.875.  The ten year yield rose 4.6 yesterday’s auction and continued strength of stocks.

–On the euro$ curve, EDZ0/EDZ1 settled at 0.0, up 1.5 on the day; there are no one-year calendars that are now negative.  The Fed appears to have convinced the markets that a negative FF target is not going to happen.  

–The recent trend is that “breakouts” only last a day or two, and then reverse course. However, this appears to be a fairly broad based move in support of a steeper curve.  All euro$ contracts out to March 2026 are below 1%, with EDH6 9902 or 98 bps.  The third purple, or EDM’26, is the first contract with a 98 handle, at 9896.  Borrowing 6 years forward at 1%.  Think about that for a minute.

–Corn and beans at new highs this morning.  I always thought that the Arab Spring was partially the result of food prices that had been jacked up to unbearable levels, and that those prices were, in part, boosted by the Fed’s initial QE program.  Perhaps that’s a tenuous connection at best.  My only point is that the year 2020 has been packed with policy decisions of all sorts that can lead to Unintended Consequences.

below is chart of DBA (the grain etf)

Bad news keeps coming. Ruby Tuesday files for bankruptcy

October 7, 2020

–Powell continues to make the case for more stimulus to support the economy.  Pelosi and Mnuchin are in endless talks to bridge the gap.  Trump finally tweets that talks will be halted until after the election.  I don’t know what the exact sticking points are, but federal aid to states for pension problems that have been festering for years is one of them.  Not every mismanaged problem can be solved by throwing more money at it.  Trump’s move is likely just a negotiating ploy, but in any case, the election is just 27 days away.  Stocks took a sharp tumble after Trump’s tweet, but are now bouncing.

–TYZ0 is currently 138-26, close to the lows of the past couple of days, in front of today’s $35 billion ten year auction.  Yesterday tens fell 2.3 bps to 73.7; curve eased from recent gains on Trump’s tweet halting stimulus talks.  Dec US (30 yr) vol retreated sharply on the futures rally as stocks tumbled, to 9.7 from 10.5.  The atm 175 straddle settled 4’50 from 5’10 for the 174 line on Monday.  The fear is on the downside for the long end, and obviously more economic stimulus heightens that fear, whether due to inflation implications or uncontrolled deficits or a combination of factors.  

–VP debate tonight.  Fed minutes this afternoon.  NY Fed chief Williams speaks in the afternoon.  

Curve getting ahead of Fed

October 6, 2020

–Yields surged yesterday, led by the long end.  Thirty year bond up 8.4 bps to 1.564% in front of Thursday’s auction (3s and 10s today and tomorrow).  The ten year note rose 6.6 to 76 bps.  SPX rose 1.8% as Trump strolled out of the hospital.  Polls show Biden well ahead in the election race, but if stocks are correlated to the economy, and if stocks rally with Trump, and if the economy is a major voting issue, then the election outcome isn’t all that certain.

–The curve steepened with 5/30 ending at a new high for the year at 124 bps (on end of day basis; it had ticked 128 earlier in the year).  2/10 closed up 5.2 at 61.5, shy of the double top at 68.  Red/gold euro$ pack spread rose over 4.5 bps to 49.75, but highs of the year are around 62.  Closer in on the ED curve, all near one-year calendars made new recent highs.  EDZ0/Z1 closed at -1.5, up 1.5 on the day and the only inverted spread.  Every spread following is successively higher, though the highest spreads are only around 20, less than 1/4% that would be thought of as an initial Fed tightening.  

–I would also note that EDH1/EDH2 rose 1.5 to positive 4.5 (9979.5-9975).  On the Fed Funds curve, FFJ1/FFJ2 is negative 3.5 (9994-9997.5).  I suppose this just reflects a positive sloping libor/ois curve, but it might be worth considering long FF calendars if market sentiment has turned.

–There is a continued buyer of EDU22 9975/9962p 1×2 for -0.5 (settles 14.25 and 7.5, 25k traded).  This and similar trades have made cheap options in reds even cheaper, and a response came in the purchase of 60k EDM22 9900 puts for 2.0.  I know a 1% strike seems insurmountable, but just remember we started this illustrious year with a FF target of 1.5 to 1.75% and the June’22 expiry is 615 days away.

–On the other hand, Powell is scheduled to speak about the economy this morning, and is sure to hammer home the idea that the Fed is not moving until inflation is well above 2%.   

Strange days and trades

October 5, 2020

–Nothing particularly exciting about the payroll report; Trump’s covid ordeal is the dominant news story.  On Friday the ten year yield rose 1.5 to 69.4 and thirties rose 2.3 to 1.48%.  Both are being auctioned this week, with the three year note kicking off tomorrow.  The curve steepened, with 5/30 ending at 119.7 bps, near the 123 double top.  This level was first seen in June, before slipping back down to 96 by late July, with another surge in late August, but the ensuing dip was only down to 110.  Third time’s a charm?  This morning USZ has pierced last week’s low of 175-08 and currently trades around that level.

–An interesting new trade was EDH2, EDM2 and EDU2 9975/9962p 1×2’s all being bought; buying the 9975p and selling 2x the 9962p.  The March’22 traded about 20k and EDM’22, EDU’22 both traded about 12k.  Settlements were 7.5/3.0 in H2, so 1.5, 10.25/5.0 in M2 or 0.25 and 13.25/7.25 in U2 or -1.25.  These trades helped crush red vol.  9975 straddles settled the previous Friday, 25-Sept at 19.0, 23.0 and 27.5 vs 9978, 9977.5 and 9976.5.  On Friday same straddles settled 17.0, 21.5 and 26.5.  This are extremely low levels with 1.5 to 2 years of time value.  A friend pointed out that EDU’21 9975/9962p 1×2 settled 3.0 and 1.25 or POSITIVE 0.5, as compared to the EDU’22 version which settled NEGATIVE 1.25 (thanks MO).  I.e. take the other side of the EDU22 trade and if nothing happens in a year it rolls in your favor, and you have a free look at long vol and deltas for possible downside.  There must be some sort of reason to enter these trades…maybe it’s a government program to transfer funds to struggling market making firms?  Just kidding, but it’s hard to see why these trades were done.

Singing the blues

Weekly Comment – October 4, 2020

It starts as a little hum and then transforms into a full blown song. 

Short note this week, focused mainly on flows into deferred (blue and gold) midcurve puts.  On the euro$ curve, blues are the fourth year forward and golds are the fifth year.  In early 2019, the flows in euro$ options centered on near term easing plays.  These turned out to be exactly right.  What we are seeing now is heightened interest in puts in blues and golds.  If correct, these trades reflect the possibility of a steeper curve and higher long end rates, so it’s worth paying attention to the positioning.

Below is a chart of the ten year treasury yield and the yield of the third gold ED contract.  EDM’25 settled Friday at 9929.0 or 71 bps, the closest to the ten year yield of 69.4.  Looking back it’s pretty clear that these track well. 

For all practical purposes, the longest options on TY are currently Decembers which expire in late Nov.  There are currently only 435 open contracts in TYH puts (expiring in February).  On the other hand, there are some open March expiry calls on TBT (bear bond ETF), but markets look a bit wide.

In order to express a view for higher long end rates and a steeper curve just using puts, it makes sense to use Eurodollar midcurves as they are quite liquid out to the June 2021 expiry on blues and golds.  There have been a lot of recent trades doing just that.  I simply looked at March and June expiration midcurve puts from strikes 9950 to 9850 to explore changes in open interest from end of day on Thursday Sept 24, to end of day Friday Oct 2.  A table is attached at the end of the note.  On the table I also included 4EZ puts with the same strikes.  Over these last six trading sessions, open interest in blue and gold March and June puts rose 152,346 contracts.  4EZ puts from 9950 to 9850 strikes rose 25.7k. 

A specific example is Friday’s new (adding) purchase of 35k 3EM1 9925 puts, which settled 9.0 vs 9950 in EDM’24.  These expire on June 11, 2021, so have 249 days until expiration.  The third blue is probably closer to tracking the 7 year cash treasury,  The 3EM 9925 puts are exactly 25 bps out of the money. 

Let’s just take a very rough comparison of gold Dec puts to ten year treasury futures puts, which perhaps gives a sense of how blue or gold midcurves relate to treasuries.  DV01 on TYZ is $90, so roughly 25 out of the money is 2 ¼ points. 

TYZ settled 139-14, so 25 bps targets 137 to 137-08.  TYZ 137p settled 11/64 and TYZ 137.5p at 15.  That means the 137 strike costs just under 2 bps and the 137.5 around 2.5 bps.  TYZ options expire November 20.  To get an option with similar time to expiration, consider 4EX0 puts, November 13 expiration on EDZ’24, which settled 9939.0.  25 bps out of the money is 9914, so let’s look at the 9912.5 strike.  It settled 2.25 bps.  This is just a rough exercise meant to convey that pricing is fairly similar between treasury and midcurve options.  The difference is that longer maturity midcurve options are available and liquid, and end users are moving in that direction. 

Just because open interest is rising, it doesn’t of course, mean that all trades are bearish in nature.  What I have seen is bearish, but there are a lot of spreads being traded which forecast limited downside of ¼% to 3/8% higher yields.

Here are just a few examples:

4EZ0 9925/9912ps 1.75-2.75 paid.  Settled 3.0 vs 9939.0 in EDZ24
3EF1 9950/9937ps 4.0 paid.  Settled 3.75 vs 9955 in EDH24
3EH 9950/9912ps 2×3 12 to 15 paid.  Settled 14 (11.5 and 3.0) vs 9955 in EDH24
3EH 9950/9925ps 1×2  2.5 paid.  Settled 2 vs 9955 in EDH24
3EM 9925p 8.5 to 9.0 paid.  Settled 9.0 vs 9950.

There are not a lot of gold March and June options open.  Trades have tended to be further out of the money, for example 4EM 9862p settled 4.75 vs 9929 in EDM25 have 1500 open.  4EU 9875/9825ps settled 5.25 vs 9923.5 in EDU25, 800 only open.  However, markets are available and relatively tight.

OTHER MARKET/ TRADE THOUGHTS

First, a brief summary of the week.  In some ways, it was a packed full of news.  The Presidential debate generated debate.  The Fed extended a ban on share buybacks for banks and capped dividends.  The week culminated with a COVID diagnosis for President Trump.

In terms of rate changes, the curve steepened slightly.  Twos gained 0.2 to 13.1 bps, fives 1.7 to 28.3, tens 3.6 to 69.4 and thirties 7.7 to 1.48%.  Therefore 5/30 spread rose 6 bps on the week to 119.7 bps.  This level is testing a double top set this year.  In June the spread reached slightly over 122 and in late August it topped at 123.  Besides these marks, the spread hasn’t been above 120 since late 2016.  Next target 140 to 142.    

Similar in theme to midcurve put buys are outright buys of ED calendar spreads.  For example, on Thursday a buyer of 15k EDU22/EDU23 spreads for 11.5.  Settled 11 on Friday, up 1.5 on the week (9975 and 9964.  Red/Green Sept). 

Last week I wrote this:

USZ0 settled 177-01.  Even as equities show some vulnerabilities, bonds have been capped in a tight range.  DV01 on the contract is $216.  30y yield at settlement was 1.403%.  As a targeted play, consider buying USZ 174/172/170p fly for 8 or 9.  Recent low in the contract is 173-16 on 8/28.  Settled 12 vs 177-01.  It was 9/10 vs 177-05.  On the 30y yield chart, a reasonable target is 1.49% which is a trend line off the March high.  Given parallel shifts that would put the contract around 175-08.  September’s low has been 175.  If these levels don’t hold, next target is around 1.6% around 173. 

Someone ran with this trade and paid 10.  Please consider sending me a Bloomberg if you coincidentally use ideas from my note so that I can execute! (at least partially).  Exact low last week was 175-08 on Thursday.  The fly settled 12 vs 175-29.  On a settlement below 175-00, target the August low of 173-16 to 173-07. 

Auctions this week starting Tuesday: $52b 3y, $35b 10y and $23b 30y.

	9/25/2020	10/2/2020	chg
UST 2Y	12.9	13.1	0.2
UST 5Y	26.6	28.3	1.7
UST 10Y	65.8	69.4	3.6
UST 30Y	140.3	148.0	7.7
GERM 2Y	-70.7	-70.9	-0.2
GERM 10Y	-52.9	-53.6	-0.7
JPN 30Y	60.1	60.3	0.2
EURO$ Z0/Z1	-4.0	-3.0	1.0
EURO$ Z1/Z2	4.0	6.0	2.0
EURO$ Z2/Z3	11.5	13.5	2.0
EUR	116.32	117.17	0.85
CRUDE (active)	40.25	37.05	-3.20
SPX	3298.46	3348.42	49.96	1.5%
VIX	26.38	27.63	1.25

OPEN INTEREST CHANGES: 3EH/3EM/4EZ/4EH/4EM 9950 to 9850 puts:

9/25/2020					10/2/2020
3EH4 PUTS	STRIKE	SETTLE	OPEN INT		SETTLE	OPEN INT	futs settle	chg OI
9958.5	9850	0.25	4032		0.5	4032	9955	0
	9862	0.5	1250		0.75	1250		0
	9875	0.75	3018		1	3018		0
	9887	1	2538		1.25	7579		5041
	9900	1.5	8570		2	8570		0
	9912	2.25	11783		3	40664		28881
	9925	3.5	13170		4.75	34907		21737
	9937	5.75	9713		7.5	14780		5067
	9950	9	5625		11.5	45108		39483
3EM4	9850	1	1100		1.25	1100		0
9953.5	9862	1.25	1250		1.75	4604	9950	3354
	9875	1.75	43030		2.25	43283		253
	9887	2.5	22000		3	22000		0
	9900	3.5	1625		4.25	5526		3901
	9912	5	27650		6.25	27651		1
	9925	7.25	44345		9	81268		36923
	9937	10	21000		12.5	13905		-7095
	9950	14.25	30400		17.25	41100		10700
4EZ4	9850	0.25	5600		0.25	5500		-100
9942.5	9862	0.5	0			0	9939	0
	9875	0.75	200		0.75	200		0
	9887	1	0			0		0
	9900	1.75	991		2	2191		1200
	9912	3	12250		3.75	19250		7000
	9925	5.5	8200		6.75	18874		10674
	9937	9	2300		11.25	9300		7000
	9950	14.5	1500		17.5	1500		0
4EH5	9850	1.25	0					0
9938	9862	1.75	0		2	100	9934.5	100
	9875	2.5	0					0
	9887	3.5	0					0
	9900	5.25	0					0
	9912	7.75	0					0
	9925	11.25	0					0
	9937	15.75	0					0
	9950	22	0					0
4EM5	9850	3.25	0					0
9932.5	9862	4.25	0		4.75	1500	9929	1500
	9875	5.5	0					0
	9887	7.25	275		8.75	275		0
	9900	9.25	0		11.75	1500		1500
	9912	12.75	0					0
	9925	16.75	0		20.5	1000		1000
	9937	22.25	250		26.75	250		0
	9950	29.25	0					0
								CHANGE
TOTAL OI>>>			283665				49707.5	178120

Payroll Friday

October 2, 2020

–Headlines this morning say the market has been “rattled” by the President and First Lady testing positive for covid, but so far, ESZ and NQZ haven’t even approached Wednesday’s lows.  Not much of a rattle. As of this writing treasuries have barely moved with TYZ 139-20 vs a settle of 139-175.  What is perhaps of more importance is that the House passed a DOA stimulus package of $2.2 trillion, about $600b more than the admin is willing to go.  The result may well be no additional fiscal help prior to the election.  Concerns are growing that growth is faltering globally, reflected by weak oil and copper prices.  Today the US employment report is released with NFP expected 875k and yoy earnings expected 4.8% from 4.7 last.  Worth noting that yesterday’s ISM Prices Paid at 62.8 was the highest since late 2018.

–Rates were little changed yesterday with tens 67.9 bps.  The early theme yesterday was continued buying in blue and gold midcurve put spreads, signifying concerns of a steeper curve.  5/30 edged to a slight new high at 118.5.  This spread started the year at 67.  The big hurdle to get over is the double top around 123.  

–NYC credit rating downgraded by Moodys.  This underscores the divide between Dems and Reps as the former want more money for state and local gov’ts.   

–A piece by Reuters yesterday notes sizable hedged call buying again yesterday (Jan and March expiry) in FB, AMZN, NFLX and GOOGL, reminiscent of buying in early August before the startling rally.  If completely hedged this is a more bearish bet as vol will firm on hard breaks.

https://www.reuters.com/article/us-usa-stocks-tech-options/options-investor-makes-big-bets-on-nasdaqs-popular-fang-stocks-idUSKBN26M7LI

Hints of a steeper curve

October 1, 2020

–Yields firmed and the curve steepened as stocks continued their ascent after a post-debate hiccup.  Ten year yield up 3.1 bps to 67.7.  Thirties up 4.4 to 145.4.  5/30 spread notched a new recent high at 118.4 bps (as the 2y was unch’d at 12.3 bps).  Red/gold euro$ pack spread (2nd to 5th year) rose 3.5 to 43.625.  Late in the day stocks encountered some volatility as McConnell said the two sides are far from an agreement for a new stimulus package, but the market seems to have concluded that more IS on the way, whether through fiscal or monetary measures.  However, the Fed announced an extension of the ban on stock buybacks and capped dividends for big banks.  

–As I have mentioned several times recently, a trend is developing in euro$ options favoring long puts and put spreads in blues and golds (4th and 5th year forward).  These aren’t huge trades, but are becoming consistent.  For example, a buyer adding another 2k 4EZ 9925/9912ps for 2.25 (settled 2.5, now up to 16k long).  A buyer of 3EH 9950/9912p 2×3 for 12 (settle 10 and 2.25 so 13.25 for 2×3).  This theme supports the idea of a steeper curve, with rates pushing higher in the longer end as the Fed has vowed to keep funding rates low for long.  

–There was a large buyer of EDZ1/EDH2 spread for 0.5, 60k, and the spread settled 1.0, at the top of the recent range.  A client has noted this period corresponds with the end of libor (and therefore the end of the turn).  On the other hand, the turn has already ceased to be much of a factor in this year.  

–While a covid vaccine and federal support will keep the economy stable, there are a few more large lay-off announcements being made.  Allstate cutting 3200, American and United furloughing 32k, etc.

–In a world dependent on computer systems, it seems as if there have been a lot more glitches recently.  Today it’s the Tokyo Stock Exchange which was halted.  Microsoft encountered service interruptions a couple of days ago.  Next thing you know it’s going to be a microphone malfunction at a debate…

–Dec Corn had its highest settlement at 379 since March.  Grain complex has been strong recently.  The ag etf DBA started the year around 16.50, made a low of 13.15 in late June and has been rallying since, closing at 14.74 yesterday.  Clearly it hasn’t received the same boost as many big stocks which have surpassed early year highs, but the rally may be more durable.

Vote Udgodskava

Sept 30, 2020

“When no one in the village signed up to challenge Nikolai Loktev, who’s from the pro-Kremlin United Russia party, he persuaded Ms Udgodskava [the cleaning woman of the local administration building] to register as his ‘rival’ to ensure the minimum requirement of two candidates.  That plan backfired when the cleaner beat him by a landslide.” 
 
I don’t know if it would be considered Russian interference, but please Ms Udgodskava, we need you to run here!

https://www.bbc.com/news/world-europe-54338785

Russian cleaner sweeps to power in surprise village vote‘Flabbergasted’ Marina Udgodskaya only entered the race as her boss needed someone else to stand.www.bbc.com

–Equities slipping in the wake of the debate.  Precious metals down, treasuries little changed.

–Large trade yesterday was the attempted exit of the EDZ0 9950/9962/9975 call fly originally bought for 4.0.  It was sold both on block and screen yesterday at 1.75 as a put fly in size of about 70k. The screen trades remained puts, but the blocks were changed to calls.  EDZ0 settled exactly on strike at 9975.  The October contract settled 9978.5…there will be no turn this year.
–Yields were slightly lower overall with tens down 1.3 bps to 64.6 bps.  The red euro$ pack (2nd year) ended +0.5 while golds (5th year) were up 2.625.  The pack spread closed just above 40 bps.  While the back end of the dollar curve outperformed to a small degree, the theme of buying puts on blue and gold midcurves remained, albeit in modest size. For example, a buyer of 10k 3EH 9950/9912p 1×2 (settled 4.75 vs 9955 in EDH’24).  
–JPM was fined $920 billion for spoofing.  That would be about 5% of DB’s market cap.

What turn?

Sept 29. 2020

–Eurodollar and treasury prices were barely changed yesterday, although front contracts which cover the turn are still showing notable strength.  October ED contract settled 9978.25 or a rate of 21.75 bps (which essentially equates to last week’s lowest ever libor setting), and EDZ0 settled up 1 at 9974.5.  Today’s libor setting will reflect the turn.  

–EDZ0/EDZ1 spread settled at a new recent high of -2.5, up 1.5 on the day.  This is now the only one-year calendar spread that is inverted.  While the spread between the white pack (average price of the first 4 quarterly contracts) and the red pack (avg price of contracts 5 thru 8) is just 1.75 bps, the spread between blues (4th year) and golds (5th year) is 20.75 bps.  This gives an indication of when the market thinks rate hikes will be possible… years from now.  However, that perception may begin to both move forward and be magnified.  While trades are quite small so far, more activity is occurring in blue and gold midcurve puts.  For example, a buyer yesterday of 7k 4EZ 9937/9925/9912p fly for 1.75, settled 1.5 vs 9942.  Also a buyer of 1k 4EM 9925/9900 ps vs 2EZ 9975 straddle.  The 4EM put spread settled 7.5 vs 9932.0.     

–Bank stocks gapped open higher and maintained strength in keeping with the general rebound in stocks.  Copper a bit lower this morning with HGZ0 at 2.97; looks like it should re-test early Aug low around 2.80.  Rough proxy for China economic strength.

–Presidential debate this evening.

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.