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 2^nd ED quarterly to the 5^th 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.  

Under the Counter

March 11, 2020

–There’s an old Bud Light commercial that’s pretty funny.  Guy goes into the convenience store and grabs a six-pack of Bud Light but also quietly asks the Asian woman at the counter for a copy of Tongue and Cheeks.  She can’t find it on the rack and yells out to another co-worker, “Hey, where do we keep Tongue and Cheeks?  This guy want porno.”  The co-worker, who is mopping the floor, gruffly shouts back, “Check under the counter.  That’s where we keep all the really weird sh-t.”  https://www.youtube.com/watch?v=xV6_7otLBRE

–Well, all I can say after reviewing the day’s action and prices is: We’re under the counter.  Yields soared in treasuries and implied vols cratered.  Both SPX and Nasdaq were +5%.  At futures settles, 2yr +14.3 to yield 48.5 bps, 5’s +19.6 to 62.3, 10’s +27.3 to 76.8 and 30’s +31.1 to 1.25%.  Hey, the thirty year is finally back above the Fed effective overnight rate!  In eurodollars, all near calendars rose to new recent highs.  EDH0/EDH1 is now the only negative one-year calendar at -34.25.  The next one, EDM0/EDM1 closed at +1.5, and they widen from there.  Red pack closed -7.375, greens -13.125, blues -17.625 and golds -21.  The market expects the eases fast and hard, and the administration is floating all sorts of stimulus balloons, which is why the forward curve is steepening.  BOE cut 50 bps this morning. Lagarde is pressing hard for fiscal stimulus, warning of a 2008 repeat. Stock futures have given back a large chunk of yesterday’s gains.

–The June TY atm straddle was down just over 1 point from 5’43 to 4’40 (TYM 137.5^).  By the end of the day plain vanilla TY options were 5/64’s wide bid/ask with size at a fraction of ‘normal’ levels one-week ago.  In back eurodollars, upside breakevens are right at the “zero-bound”.  For example, EDM22 settled 99.35 and the 99.375 straddle settled 60.  So upside breakeven of 99.975.  As if zero really represents a cap.  At one point during the day, the red March (EDH21) 9950 straddle was under 30 bps, with over a year left until expiration.  It settled 32.0.  EDM1 9950 straddle settled 36 vs 9951.  Therefore the put is 17.5.  Pretty cheap for 15 months away with a government that’s going to throw the kitchen sink at the virus.  

–March midcurves expire Friday with atm straddles from 12.5 to 14.5.  Ten year auction today.  

Historic day

March 10, 2020

–SPX fell 7.8% yesterday with Nasdaq -7.3%.  SPX hit the 61.8% retrace from the 2018 low to this year’s high.  Nasdaq did not quite touch the 50% retrace. At the low SPX was close to a 20% pullback from the high of the year.  Everything, including crude oil, has had a nice bounce overnight as the admin looks to unleash stimulus.  With CLJ0 having plunged to 27.34 yesterday morning, it’s now 32.80.

–Near atm euro$ straddles came in hard.  For example EDU0 9950 straddle settled 31 on Friday, but yesterday EDU0 9962^ settled 22.5.  However, blue Sept (3EU) atm straddle was unchanged at 47.5, having been the 9925 strike Friday and the 9937.5 strike yesterday.  Yields plummeted to new historic lows yesterday morning with tens hitting 31 bps and 30’s at 70 bps.  Closes (at futures settlement) were significantly off the lows, with tens 49.5 bps, down 21 from Friday, and 30’s 93.8, down 26.5 from Friday.  The convexity grab was relentless with 5/30 down 13 to 51 bps, though it may have run its course for now.  Supply coming in the form of new tens and thirties tomorrow and Wednesday.  Nominal treasury straddle levels have more than doubled from last Thursday to yesterday.  

–Peak on the ED curve is EDH21 with a settle of 9960.5 or 39.5 bps.  peak on the FF curve is FFQ0 at 9989.5 or 10.5 bps.  The Fed has increased the size of repos.  I was looking this morning for discount window borrowings but couldn’t find the data.  In any event, it seems like the Fed can now wait for the FOMC meeting to pull the trigger on another 50.  

–In another sign of stress gold/silver ratio matched the record high of 1991 at 99.50.  Makes silver look a bit cheap and indeed as of this writing silver is up a bit and gold is lower as stocks bounce.   As a point of reference, the ratio is now 3 times higher than the plunge low in 2011.

ZIRP

March 9, 2020

–Starting this morning with a link to CME price limits in S&P’s.
https://www.cmegroup.com/trading/equity-index/faq-sp-500-price-limits.html

FAQ: S&P 500 Price Limits – CME Group7% decline. A 7% decline (Level 1 circuit breaker) in the S&P 500 Index before 2:25 p.m. CT will trigger a NYSE Rule 80B trading halt for both the cash equity market AND all U.S.-based equity index futures and options, including E-mini S&P 500 and S&P 500 futures and options.www.cmegroup.com

We’ve obviously hit the hard limit overnight at 2819.0 in ESH0, down 5% from Friday’s VWAP reference price, which is down 145.  As the day session opens the next circuit breaker will be down 203 or 7% at 2697.  Then 13% and then 20%.

–Ten year yield is 50 bps, down 20 bps.  The price of oil has rallied significantly off the low and is now above $32/bbl, but was down about 1/3rd from Friday’s close and is still down around 20% currently.  In part, the Russians wanted to cause damage to US shale producers by not agreeing to production cuts, and the Saudis obliged with declaration of a price war, but I would bet my bottom dollar that discussions are already occurring for the US gov’t to buy US shale product for the SPR.  Once again, governments are likely to transfer bad private debts onto public balance sheets.  A forced move to Modern Monetary Theory.  There are a few jokes about Theory vs Reality, but we’re about to live it, and it might not be so funny.

–Treasury auctions 3, 10 and 30 year paper this week, raising $54 billion in new cash.  In dollars, reds (2nd year forward) are over the 9950 strike.  The 100 calls are no longer a passing curiosity, now just another strike price subject to exaggerated claims (“Oh yeah, I bought 100 calls a long time ago.  Sure I own ’em.”)  On last night’s open I was able to buy some FFJ0 up to 9960.5 and FFK0 at 9967.5.  Prices now are 9969.5 and 9980.  August FF (FFQ0) have a high print of 9992.0 or 8 bps.  

Wrath of the Market Gods

March 8, 2020 – Weekly comment

This past week was the stuff of Greek mythology.  Everything is going along fine, and the next thing you know you’re chained to a boulder on a mountain and an eagle swoops down to eat your liver every morning (it grows back overnight).  This of course, is the story of Prometheus, who was punished by Zeus for stealing fire of the gods and giving it to mankind. 

The name Prometheus is translated as the ‘forethinker’ or ‘the one who thinks ahead’.  According to a post in wikipedia, “Prometheus became a figure who represented human striving, particularly the quest for scientific knowledge, and for the risk of overreaching, or unintended consequences.” From D’Aulaire’s classic Book of Greek Myths, Zeus wasn’t finished with the punishment.  He also had to deal with mortals.  “He sent to earth a beautiful but silly woman.  Her name was Pandora.” [all this by the way of background for my friend Beth].

You know how it goes from here.  No, I am not talking about the chaos unleashed by Pandora’s box, although that might be an apt analogy at this point.  I’m talking about the Fed, the champion of all humanity, playing with fire and operating with unintended ‘foresight’.  Several Fed officials have concluded in previous speeches that negative rates aren’t a good idea for the US economy.  So now, we’re going straight to QEEEEE.  Sure, the $60 billion of t-bill buying is going to end sometime after the April tax date.  Only to be supplanted by a much larger QE operation designed to cap long rates.   Or that’s what they will say. The problem with that is, rates have already imploded.  The two year fell 39 bps this week to just under 49 bps.  Tens down 42 to 70.3 bps. 30’s down over 45 to 1.204%.  I can’t even fathom this last one.  US thirty-year bond at 1.20%!!  Why, that has even matched the ten year yield in Greece.  : – l

The real purpose of the new round of massive QE will be to monetize the unconstrained government debt.  Deficits are already explosive and a slower economy with more emergency government spending like the $8 billion dollop passed for COVID is not going to help.  By the way, in Japan, Abe is offering free loans to companies hit by the virus, and subsidies to affected workers. Northern Italy is going on lockdown.  NY declared a health emergency.  In skimming the Reuters main news site this morning, the first 20 out of 20 articles mentioned COVID-19.  

The former incarnations of QE didn’t lead to inflation, but rather tended to be deflationary, as money created by the Fed flowed into investment funds smothering yields rather than juicing consumer spending.  This time may be different… eventually. The political landscape has changed.  Well-oiled global supply chains may now require duplicate structures; another layer of cost.  For the companies that survive, there will be a big incentive to make up for lost revenues.  In the medium term, there is certain to be economic harm from cancelled events which trickle down to all sorts of support businesses.  For example, at Chicago’s McCormick Place convention center, the Housewares Show slated for March 14-17, with 60,000 attendees, has been cancelled.  The economic slowdown is pretty obvious from the price of oil, where WTI CLJ0 fell 8% this week and is down a third from the start of the year. More on oil and the new and improved PRICE WAR below.

Let’s take a look at a few prices.  Star performer this week was April FF which rallied 70 bps to close at 99.49 or 51 bps.  Money market curves have forecast continued front-loaded easing.  The peak on the Eurodollar curve is now the first red, EDH21, which also settled 99.49.  All the easing is priced for the next few months.  Be careful of what you wish for President Trump…  For example, April to Aug FF is a spread of -26 bps, while April’20/April’21 is -28.5.  I.e. the meat of the inversion is up front.  On the FF curve, the peak contract is Jan’21 at a price of 99.805, just under 20 bps.  Of course, with the post-ease Fed effective of 109 bps, another 50 bp cut at the March 18 FOMC would put it at 58 to 60 bps, and the price on FFJ20 at 51 bps implies even more of an ease.  It’s incredible. 

There are stories circulating about various funds and option market makers blowing up last week, Completely corroborated by price action.  These moves simply don’t happen without extreme duress.  One upstairs market maker we transact with said their systems were down on Friday afternoon when we asked for a quote.  Maybe the systems did have a glitch.  Then again, maybe the plug was pulled.  There was talk of a fund being forced to liquidate shorts on the long end on Friday. Makes complete sense from price action.  (BBG’s Beth Stanton article notes that long end futures were halted 5 times Friday due to the extreme move). 5/30 treasury spread which had soared up to 90 bps after the surprise cut, plunged an astonishing 25 bps on Friday alone, back to the levels from early in the month, ending 64.5 at the time of futures settlement.  There was talk of a forced market-maker liquidation in equity options.  Again, pretty apparent from VIX which exploded to 54 on Friday before coming back to close just under 42.   The risk guys don’t pay all that much attention to market nuance when exiting positions.  I recall I was once handed a fairly large ED option position on the CME floor and instructed to exit it by a friend at another clearing firm.  Not at all large by today’s standards, and the market wasn’t particularly volatile at that time, but it still took me half the day to try to minimize damage.  I am guessing the shoulder taps were occurring all week, with no one wanting to keep undercapitalized risk on the books over the weekend.

And there’s good reason to fear Monday.  On Friday, the OPEC+ meeting in Vienna collapsed as Russia refused production cuts, and want US shale producers to feel the burn.  WTI fell about 8%  this week. The Saudis had shouldered a large part of the burden to keep production off the market, but now MBS has declared a price war, opening the production spigots and slashing the price of KSA’s crude to $8-$10 below the Brent benchmark.  This, at a time when the House of Saud is already under severe pressure, with MBS arresting a few royals for plotting a coup.  In late 2015 to early 2016 as WTI tumbled to $27/bbl, BBB credit spreads gushed to 300 bps.  Most of the damage was in energy names.  Currently, the BBB spread is around 170 bps, at a time when the virus is already causing companies to cut revenue guidance, which may, in turn, imply that debt servicing is suspect.  The first victims in the BBB cliff have already been pushed over the edge.  Perhaps there will be some forbearance in downgrades by the rating agencies.  Then again, maybe not.   In any event, there was significant buying of April and June puts on EDM0.  A cascade of credit events is quite plausible. 

OTHER MARKET/TRADE THOUGHTS

So what’s crazy?  I reviewed my note from two weeks ago and I had cited the EDM0 atm 9850 straddle which had settled at 22.0, up from the previous week’s 20.5.  On Friday the new atm strike was 99.375 and the straddle settled 34.5!  The EDZ0 9937.5 straddle, with SIX months longer until expiration, settled 36.0 vs 9943.5.  The EDU0 9950 straddle settled 31.0 vs 9947.0.  I’ve only seen straddle inversion once before and that was during the financial crisis. 

Another sign of extreme stress is in libor vs OIS.  I will just give futures pricing examples.  This week, forward implied lib/ois spreads surged 27.5 bps for March to 42.5 and 18 bps for June to 34.5! If Central Bankers have lost all control, who knows where spreads *SHOULD* be.

Treasury auctions 3, 10 and 30 year paper this week.  From these yield levels I would think auctions will be sloppy and have significant tails.

	2/28/2020	3/6/2020	chg
UST 2Y	88.1	48.8	-39.3
UST 5Y	91.3	55.9	-35.4
UST 10Y	112.7	70.3	-42.4
UST 30Y	165.7	120.4	-45.3
GERM 2Y	-76.9	-85.8	-8.9
GERM 10Y	-60.7	-71.0	-10.3
JPN 30Y	27.9	31.1	3.2
EURO$ H0/H1	-56.5	-42.5	14.0
EURO$ H1/H2	3.0	9.5	6.5
EUR	110.27	112.86	2.59
CRUDE (1st cont)	44.76	41.28	-3.48
SPX	2954.22	2972.37	18.15
VIX	40.11	41.94	1.83

https://en.wikipedia.org/wiki/Prometheus

https://www.greekmythology.com/Titans/Prometheus/prometheus.html

https://www.zerohedge.com/commodities/saudi-arabia-starts-all-out-oil-war-destroys-opec-flooding-market-slashing-oil-prices

https://www.bloomberg.com/news/articles/2020-03-07/putin-dumps-mbs-to-start-a-war-on-america-s-shale-oil-industry?srnd=premium

I suggest you panic

March 6, 2020

–Prior to this week, the Fed was engaged in soul-searching related to the mid-September repo surge.  The current episode will probably make that one look like a walk in the park.  Consider these settlements and current prices: On Tuesday, post-ease, FFJ0 settled 9921, FFN0 9940.5 and FFF0 9954.0.  This morning, with net change from yesterday, and from Tuesday, FFJ0 9941.0, +7.5, +20, FFN0 9971.0 +8.0, +30.5, and FFF1 9979.0 +7.5, +25.  Now compare that to EDM0 and EDZ0.  On Tuesday, EDM0 9921.5 and this morning 9933.0, 0, +11.5.  EDZ0 on Tuesday 9928.5, now 9942.5, +3.5, +14.0.  

So, FFN0 to EDM0 spread has doubled from 19 to 38 since Tuesday.  FFF1 to EDZ0 from 25.5 to 36.5. 

–At the end of yesterday FFN0 was up 10.5 on the day and EDM0 came under selling pressure, trading 9927.5, -5.5.  These are typically pretty stable money market rates and spreads.  This surge in libor/ois is symptomatic of stress, and it doesn’t look like it’s going away.  FFJ0 this morning has completely priced another 50 bp cut at the March FOMC meeting (or before).  Money markets have an advanced case of the virus, while stocks are currently sniffling with a light cough.

–On Feb 21, the day after ESH0 peaked, FFJ0 settled 9843.5.  It’s now up 100 bps in 2 weeks!!  You want stress?  The market is now clamoring for more front-loaded Fed relief.  However, this doesn’t fall under the smug definition of ‘some insurance’ as Bullard intimated yesterday, it’s more like, ‘no GI Joe with the kung-fu grip’.  For the youngsters out there, it means they panickin’.  I can feel it. 

–This is going to be a restless weekend for Fed members.  Last Friday’s Fed statement didn’t calm the markets.  Tuesday’s surprise cut didn’t calm the markets.  Where’s the bazooka?  Better yet, where in the hell is Beeks?

Front-loaded ease

March 5, 2020

–The market dialed down risk yesterday, with ESH0 soaring 117.75 to close at 3114.75.  The Feb 20 high of 3397.50 to the subsequent low of 2853.25 has a 50% retrace at 3125.  This level was tested yesterday, but appears to have failed as ESH currently is -59.  Other examples of receding risk yesterday were seen in rate implied vol (treasury vol pictured below) and in precious metals which couldn’t rally in spite of a weaker dollar.  The curve steepened as the market perceives frontloading with respect to Fed easing.  All one-year calendars in euro$’s from EDM0/M1 back made new highs.  Red/gold pack spread jumped 5 bps to 36.25, up 20 bps from the low set Feb 21, just after stocks peaked.   In dollars, white pack +6.8125, reds +5.875, greens +3.625, blues +1.375 and golds +0.875.  The ten year yield was down a couple of bps, marked at 99.9 bps at the time of futures settlement. 

–Bank of Canada cut 50 yesterday.  The US curve is smugly pricing all ease in the front.  For example, FFJ0/FFV0 settled -38.5 while FFJ0/FFJ1 settled -39.5.  That is, in the period after the March FOMC through September, the market expects one to two more cuts, but after that, nothing. Peak contract on the dollar curve remains EDH21, which settled +5.5 at 99.395, but EDU0 is very close at 98.38.  

–Some example of profit taking yesterday.  EDZ0 9950 calls were sold from 4.5 to 4.0, an exit of the 100k bought last week for 1.5, OI fell 130k.  April FF traded to a high of 99.29, a rate of just 71 bps vs what should now be the current Fed effective of around 110 bps.  So at the peak, the market was projecting odds of around 80% that the Fed goes 50 at the March FOMC meeting.  Just after that high was made, Bullard made comments throwing cold water on the prospect of another aggressive ease at the meeting and FFJ0 settled back down at 99.22.  In another example of odd pricing, EDH0/EDM0 atm straddle spread settled 17 bps, with March nearing expiration.  (EDH0 9900^ 10.0s and EDM0 9925^ 27.0s).  However, EDM/EDU straddle spread settled at just 1.5 (EDU0 9937^ 28.5s).  Probably won’t be there this morning.  

–California declares state of emergency.  United Airlines cutting domestic flights. 

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