New curve highs at quarter end

April 1, 2021

–The quarter ended with new highs in the curve.  2/10 up 0.8 to 158.3.  Red/gold euro$ pack spread (2nd to 5th year) just over 182 bps.  New high for peak one-yr euro$ calendar:  EDH23/H24 and EDM23/M24 tied at 77.5 bps.  This, as Biden announced his massive tax and spend plan for infrastructure and SPX made a new all-time high before a modest pullback into the close.  Implied vol firmed significantly in back dollars, supporting the move towards higher yields and further steepening; straddles up 1.5 to 2 bps.  As examples, 2EU 9800 straddle from 37 Tuesday to 38.5 yesterday.  3EZ 9812^ from 66 to 67.5.  While Friday’s payroll data could change the picture, price action and the curve signal a move to still higher rates.

–Worth a note that May Corn is at a new high this morning 578.  After spending Feb and March bouncing around 530 to 550, a bullish USDA grain report sparked a close above 564, with further strength today.

–Jobless Claims today expected 675k from 684k.  Manufacturing ISM expected 61.5 from 60.8.

Posted on April 1, 2021 at 5:01 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Pinning the 5y yield

March 31, 2021

–One large trade to high-light yesterday, a buy of 25k FVM 123/122/121 p fly 9 to 9.5.  Settled 8.5 vs 123-18.  Max value at expiry is of course at center strike of 122, around 1.20% vs current 5y at 91 bps.  Seems far away until one considers the initial taper tantrum high in the 5y yield was 1.61% in July 2013 and ultimate high was 1.85% in September.  I’ve attached a continuous futures chart, which indicates just how lofty we still are given continued massive fiscal spending during the grand re-opening.  There was also a late block buy of over 3k WNM 182-28, just above $1m DV01.  WNM settled 182-12.  Note that 5/30 continues to drift lower, now 148.5 from a high in March of 162, and that the two trades cited above, taken together even though done independently, support the flattening of 5/30.  Action is moving to the belly.  By the way, during taper tantrum, 5/30 ranged between 210 and 235 bps, ultimately reaching 250 at the end of the year.  Again, the tantrum might not be the proper road map, but modest flattening in 5/30 doesn’t really indicate that the move is over.

–New high, but just barely, in euro$ curve.  Red/gold now at 180 compared to 2/10 at 157.5. Steepness continues to move forward on the curve.  

–Biden set to announce $2 trillion plus infrastructure plan today.  ADP also released expected 550k.

Posted on March 31, 2021 at 5:46 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Market focuses two years forward for Fed changes

March 30, 2021

–Rumors of NFP even greater than the expected +650k and Wednesday’s expected $3 trillion infrastructure plan conspired against fixed income on Monday (with follow-on new lows this morning).  New Fed Governor Waller categorically denied that the Fed will keep rates low to help fund the deficit.  I’ve included a couple of speech snippets below, but omitted the hot mic, “We’re not Turkey, you know!”  

–The ten year note rose 6 bps to 1.718%.  Gold eurodollars (5th year forward) made new lows, falling 7.625.  Red/gold pack spread posted a new high, just under 179 bps. with 2/10 just shy of its recent high of 158.  The interesting aspect of yesterday’s curve trade is actually the jump in reds to greens, 2nd to 3rd year.  Net changes: Reds -1.875, Greens -6.625, blues -7.0 and Gold -7.625.  The kink here is obviously reds/greens….as if the Fed can hold the line on rates for the next two years (through reds) but will be nudged into action by the market by March or June of 2023.  Similarly, 2’s/5’s had a nice boost of 3.4 bps yesterday.  



–I’ve attached a chart of EDU2/EDU3/EDU4 futures butterfly which captures this dynamic, having jumped from -8.5 to flat in a couple of days as EDU2/EDU3 widened much faster than EDU3/EDU4. (thanks DK).  

–Seller yesterday of EDZ1 straddle at 8.0, which then settled 8.5.  Sort of amazing to me that with Archegos related stress at Credit Suisse and Nomura the market feels comfortable that nothing can happen over the next nine months into year-end.  I’ll bet the Fed is happy they allowed banks to engage in share buybacks and dividends again, as they liberally employed off-exchange, off balance sheet CFD’s (contracts for differences) to abet Archegos.   Buyer of 25k EDM1 9981.25/9975p 1×2 for 0.25 appears to be a roll up. 

–Big Dallas Fed Mfg survey at 28.9 vs 16.8 expected.  Price subsets also jumped.  I have a cousin who owns a machine tool shop in St Louis (Precision Tools) who told me yesterday: “We have only seen a very modest increase in our raw materials prices, maybe 4-5% and this just recently occurred.”  Half full can focus on “modest increase” while half empty can focus on “4-5% just recently”.

WALLER comments:

…Because of the large fiscal deficits and rising federal debt, a narrative has emerged that the Federal Reserve will succumb to pressures (1) to keep interest rates low to help service the debt and (2) to maintain asset purchases to help finance the federal government. My goal today is to definitively put that narrative to rest. It is simply wrong. Monetary policy has not and will not be conducted for these purposes.

Consequently, the argument goes that a hot economy may cause substantial inflation pressures that are hard to rein in politically, and which ultimately harm Americans in the longer run. This view is backed up by the political economy literature, which argues that having monetary policy under the control of political authorities may lead to excessive inflation and economic volatility that is not socially optimal.11 Put another way, it can lead to an unstable economy, on which households and businesses cannot rely.

Posted on March 30, 2021 at 5:28 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Price Discovery

March 28, 2021 -weekly comment

Daily chart of DISCA (Discovery)

Someone “discovered” stocks don’t always go up.  Above is a chart of Discovery Inc, one of the names in Friday’s block trade purge.  There’s a lot of talk about the $10 billion-plus block sales on Friday, and the fund that was liquidated.  It’s worth noting just a couple of the market cap changes.  From March 22 to Friday, Baidu (BIDU) fell about $20 billion in value, with Discovery losing an equal amount since March 19.  In fact, BIDU closed at 340 on Feb 19, and 208.61 on Friday, so the loss in market cap since mid-Feb is over $45 billion.  Granted the closing price is still above the closing level for 2020, but these were massive moves.

From recent highs to Friday’s lows many of these stocks were cut to HALF PRICE.  Here’s a list of stocks with highs from March 23 to lows on Friday March 26:

Baidu (BIDU)                      263.71   to            174.05

Tencent Music (TME)       32.24    to             16.31
Vishop (VIPS)                      46.00    to            24.98
Viacom (VIAC)                    96.34    to            39.81
Discovery (DISCA)            72.42    to             34.60
Farfetch (FTCH)                 61.46     to             41.25
IQiyi (IQ)                              28.97     to             14.60
GSX Techedu (GSX)         83.57     to             29.40

I don’t know this list to be all inclusive.  All still closed above the 12/31 closes, though some just barely.  All had bounces off the lows.  News reports claim the fund was highly leveraged and couldn’t meet margin calls.

**Late in the day at Goldmans offices:  “We cleaned up all the stocks right?”  “Yes, got out of everything.” “Good, I’m about ready for a cold beer.  Where’s that annoying intern that keeps claiming he’s over-worked?“  Intern returns, clutching trading statements. “Boss, it looks like these guys might have been short SP futures as a hedge to their long stocks.”

I’m just joking of course, but could something like that have accounted for the ramp in the last hour of the day in ESM1 from 3908 to 3968 from 2:50 to 4:00? 

We’re in a time where a loss of billions in a given fund barely causes a ripple.  It’s not like 1998, where a loss of $5 billion by Long Term Capital Markets (LTCM) nearly brought down the system and sparked a bailout engineered by the Federal Reserve.  It’s just a “one-off”.  Like the ship stuck in the Suez Canal.  It’s not as if there are currency devaluations and defaults like the 1997 Asian crisis and 1998 Russian crisis.  Turkey… it’s a one-off.  Just a temporary block in the plumbing.  It seems to me we’re seeing a lot more “one-offs” recently.

It’s somewhat interesting that in 1997 to 1998 as the Asian Tiger crisis and LTCM unfolded, the ten year treasury yield went from nearly 7% to a capitulation low of 4.2% in the beginning of October 1998.  The lack of buying in the ten year now underscores the nonchalance of the market with respect to possible risks.  Or, maybe there IS buying, but massive supply nullifies the chance for a yield decline from what are already low levels, especially with inflation signals percolating.   

While yields did fall on the week, with tens -6.8 bps from 172.6 to 165.8, the trend higher is still intact.  The back end of the Eurodollar curve remains notably weak.  EDU’25 closed at 9793.0, just 4.5 bps above the lowest close of the move which was the previous Friday at 9788.5.  Once again, it’s worth noting that the ultimate low close for the second gold (18th quarterly) in the taper tantrum of 2013 was in September at 9617.0.  Over 175 bps lower than the current level.  The ten year topped at 3% vs 1.66% now.  Perhaps the tantrum isn’t a suitable roadmap.  However, we’re looking for nonfarm payrolls to be about 650k on Friday.  Pre-covid there hasn’t been a payroll number above 400k in the past 20 years except for one post-GFC reading in May 2010 at 540k.

Truly interesting website on John Mauldin’s weekly piece, WTF Happened in 1971, (when Nixon abandoned the gold standard).  It appears to be a huge inflection point.  A lot of charts.  In the 70’s inflation was running 5-10% and started 1980 around 15%.  Fifty years ago.

https://wtfhappenedin1971.com/

Another informative article by Harley Bassman last week on vols and convexity

http://www.convexitymaven.com/images/Convexity_Maven_-_Lurking_at_the_Scene.pdf

OTHER MARKET THOUGHTS/ TRADES

The peak one-year ED calendar on the curve is still EDM23/M24 at 72.5.  High settle has been 76.5 on 19-March.  Interesting to note that greens to blues (3rd to 4th year) has been the steepest part of the curve.  In part, this is due to the libor transition.  While one-year calendars from greens to blues declined a few bps this week, blues to golds made new highs.  As an example, EDM4/EDM5 closed at 55 on 19-March, but settled 56.0 on Friday with a new high print of 57.  I find the direction of the blue/gold pack spread highly correlated to 10/30 treasury spread.  The thirty year bond remains vulnerable to further inflation pressures.

3/19/20213/26/2021chg
UST 2Y15.213.9-1.3
UST 5Y89.785.4-4.3
UST 10Y172.6165.8-6.8
UST 30Y244.8236.6-8.2
GERM 2Y-69.5-71.5-2.0
GERM 10Y-29.4-34.6-5.2
JPN 30Y66.766.2-0.5
CHINA 10Y323.7319.8-3.9
EURO$ M1/M29.58.5-1.0
EURO$ M2/M344.042.5-1.5
EURO$ M3/M476.572.5-4.0
EUR119.07117.96-1.11
CRUDE (active)61.4460.97-0.47
SPX3913.103974.5461.441.6%
VIX20.9518.86-2.09
Posted on March 29, 2021 at 5:29 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Margin call

March 29, 2021

–Now it’s fallout from Archegos as Credit Suisse and Nomura warn of losses related to Friday’s fire sale position liquidation.  As Kevin Spacey playing Sam said in the flick Margin Call, “Forty percent done by ten fifteen, by eleven o’clock all your trades have to be gone, because by lunchtime, word’s going to be out and by two o’clock you’re going to be selling at sixty-five cents on the dollar if you’re lucky.  Then the Feds are going to be in here, up your ass, trying to slow you down.”  Well, they didn’t quite achieve 65 cents on the dollar on the late stuff.
–ESM has given back a portion of Friday’s late ramp-up (now down 22).  Fixed income barely reacting.  On Friday, the ten year inflation breakeven (ten year yield vs inflation-indexed note yield) edged to a new high of 235.7 bps.  Summers in a tv appearance Friday: “The idea that it [inflation] can’t rachet up quickly is just plain wrong.”  
–While 2/10 spread is 6 bps off the recent high of 158, (as of Friday close), red/gold eurodollar pack spread is only 4 off the high of 177.125.  Back end of dollar curve remains well offered, with golds closing -6 on Friday.  The gold pack (avg EDM’25, U’25, Z’25 and H’26) settled 9788 or 2.12%. 



Posted on March 29, 2021 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Mark Twain market

March 26, 2021

–Tens ended unch’d yesterday, though the curve steepened as a couple of late +TY vs -WN blocks went through (details below).  10/30 rose 2 bps to 72.1.  Steepening also apparent in the back end of the dollar curve with the blue back +0.625 and gold pack -1.625 (blue/gold pack spread is directionally correlated with 10/30).
–Chart attached shows that the dollar index pierced the 200 day moving average with the potential for further gains.  Stocks staged a surprising rally from early morning weakness.
–ZH has a story citing the Financial Times that Credit Suisse is considering using its own capital to reimburse clients who lost money ($3 billion) in funds related to the Greensill collapse.  In the “history often rhymes” category, some might recall that in May of 2007, Bear Stearns injected its own capital in two collapsed mortgage funds.  Stocks took a modest dip after that news, before going on to make new highs.  So….everything’s fine.  Rumors of my demise are greatly exaggerated.
–News today includes the Fed’s favorite inflation indicator, Core PCE prices, which are expected +1.5.  On a month to month basis Personal income expected -7.2 and Spending -0.8. 
–April treasury options expire today.   

BLOCKS:
+8536 TYM 132-00 vs -2087 WNM1 183-29
+12506 TYM1 132-03 vs -3036 WNM 183-30

Below is a very loose reference to Mark Twain riverboat stories…

https://www.youtube.com/watch?v=hzQnPz6TpGc
https://www.youtube.com/watch?v=hzQnPz6TpGc
https://www.youtube.com/watch?v=hzQnPz6TpGc

 

Posted on March 26, 2021 at 5:46 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Whip Inflation Now

March 22, 2021

–Turkey’s Erdogan sacked the head of the Central Bank Naci Agbal, because rates were too high.  Here come capital controls.  –Interesting video from 1978 featuring Jimmy Carter’s plan to stop inflation (I believe it was posted by Eric Peters of One River Asset Mgmt).  It’s all about gov’t austerity: “The gov’t has been spending too great a portion of what the nation produces.”  

–Contrasts couldn’t be sharper today.  The US has the central banker Turkey would love…low rates forever.  The US gov’t is spending as much and as fast as it can.

Jimmy Carter-Anti-Inflation Program Speech (October 24, 1978)President Carter defines what America needs and what he plans to do in order to stop the progress of inflation.www.youtube.com

–WIN, an acronym for Whip Inflation Now! was started by Gerald Ford in 1974.  In 1978 it was still Carter’s number one problem.  Not always transitory.

–Friday featured new curve highs with 2/10 at 158 bps and red/gold pack spread 177.  Back end of the dollar curve was especially weak with blues and golds (4th and 5th years) down 5 to 5.5 bps even as tens closed close to unchanged.  Peak one-year calendar is EDM23/EDM24 at 76.5 bps, up 6.5 on the week.  EDU1/EDZ1 made a new high Friday at 7.5, even as EDZ1/EDH2 remains pinned to its recent low at negative 4.  The market is already concerned about year-end pressure, which may have negative connotations for credit in general.–Treasury auctions twos, fives and sevens this week.  Powell speaks today, and appears with Yellen in front of the House tomorrow.

Posted on March 22, 2021 at 5:26 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Stubborn Authority

And though authority be a stubborn bear,
yet he is oft led by the nose with gold[s]

Comment – March 21, 2021

************************************************

Now is the winter of our discontent made glorious summer by this sun of York.


And so, it’ll turn out to be a one-time sort of bulge in prices. But it won’t change inflation going forward. Because inflation expectations are strongly anchored around 2%.


Every part of me looks at this and says this is insane.   …I think you’re actually placing too much value on the work.  I think we’re in some level of a bubble. 

***

I’m starting with three quotes.  The first is, of course Shakespeare from Richard III.  I am not referring to this play to conjure comparisons to political intrigue at the level occurring on today’s geopolitical stage, though there are worthy parallels.  I only start with it because the winter of 2020/2021 is over with the first official day of spring and I’m hopeful the covid winter is also behind us. (The title quote is from The Winter’s Tale).

The second quote is from Jay Powell’s FOMC news conference.  As everyone in the markets knows, Powell isn’t inclined to budge on rates until he sees the whites of inflation’s eyes.  But the above comment captures the absolute core of the debate occurring in markets:  Is inflation transitory or gaining traction?  Are expectations REALLY anchored at 2%?  Gold Eurodollars think not.

The final quote is, of course, a hedge fund manager excoriating his peers and calling stocks a bubble.  No.  Actually it’s not.  It’s an opinion from the artist BEEPLE, whose digital work sold for $69 million.  He was interviewed by Julia Chatterley on CNN.  The link is below.  I LOVE this guy, Mike Winkelmann.  He is articulate, thoughtful and genuine; within a few minutes I got a much better sense of the world of NFTs.

***

I read Richard III in highschool.  My English Literature teacher deconstructed this play and all of the characters and their relations to one another.  She translated the meanings of some of the more complex passages.  This class helped me appreciate English language and history and political psychology.  Thank you Miss Schultz.  Somehow I think coursework like this is no longer deemed important as it chafes against the equality narrative. It is.

At the margin, those who take issue with the idea of inflation expectations being firmly anchored have already had their way with the yield curve.  As I noted during the week, the red/gold euro$ pack spread has moved with greater intensity and about the same magnitude as occurred during 2013’s taper tantrum.  By definition, tantrums pass.  I’m not so sure about this one. 

Yields ended the week at new highs, with the five year at 87.6 bps (+3.1), tens at 172.6 (+9.4) and bonds at 244.8 (+4.9).   On the week, the 5/10 treasury spread rose 6.3 bps to 85.  However, 10/30 actually declined by 4.5 to 72.2.  The fact that 10/30 eased should act as a potential warning signal that some aspects of the curve move have stalled. Steepening thus far has been fierce.  However, on Friday the gold euro$ pack was still the weakest thing on the strip.  EDZ’25 which had been featured in a couple of large block trades and is now the 3rd gold, ended the week down 15 at 9777.0!  More on golds below. 

What about the SLR?  Well clearly it hit banks somewhat, with JPM tumbling 4% to 151.19  on the news that the Fed will let loosened regulations expire, before snapping back at the end of the day to close down only -1.6%.  The biggest issue with the SLR decision is this: the US treasury has a LOT of bonds to sell, and the market is nervously wondering how they get absorbed.  The last 7-year auction went poorly, and we have another one this week.  These higher yields will likely attract buyers.  Are they high enough?  The Feb 25 auction went off at 1.195% with bid to cover of only 2.04.  On Friday, the WI 7yr was 1.38%.

Look at the image below of curve steepening.  In 2013’s taper tantrum I marked the move from late April to December at 142.5 bps to 305 for a total of 162.5.  Eight months.  The current magnitude of the move has been 146 bps starting from the “new framework Fed” in August.  Seven months.  In the 2013 episode, the Fed did not actually hike from zero (0-0.25%) until two years after the curve peaked.  The first hike was in Dec 2015.  In the current incarnation, the market also expects a hike in about two years.  However, is there anything stopping the curve from running another 100 bps??  In 2013, I’m sure there was a bit of “pent-up demand”.  But can it be anything like post-covid demand?  In the wake of the GFC there was robust government spending with programs parceled out over a few years.  Is it anything like today’s gargantuan spending?  Back then the Fed’s balance sheet was exploding, from $2.92T at the start of 2013 to $4.0T by the end of the year.  Since last August’s change in framework, the Fed’s balance sheet has exploded from $6.9T to a new high at $7.7T.  What is going to arrest this move? 


One other key note: On May 1, 2013, the 18th quarterly euro$ contract (2nd gold) was 98.245.  By Sept 5, when the contract bottomed, it was 96.17, or 3.83%.  With funds at 0.125%, same as now.  On Friday, EDM’25, the 2nd gold, settled at 97.885 or 2.115%.  Catch the falling piano.    

During the Julia Chatterley interview Winkelmann outlines the inherent value of blockchain tokens across the economy.  At the end Chatterley asks, “Did Beeple just call NFTs a bubble?”  The response, “One Hundred Percent”.  Is it just me or does he look a little bit like Powell in that picture? 

This week features 2, 5 and 7 year auctions of $60 billion, $61 billion and $62 billion.  Staggering numbers.  Powell speaks on Monday, Tuesday and Wednesday.  However, he was very clear, organized and eloquent in presenting his argument for transitory inflation.  There is simply no reason to forecast a change in tone.  Although there are a lot of Fed speakers over the week, Tuesday is likely the most important, with Powell and Yellen in front of the House and Brainard also speaking.      


OTHER MARKET THOUGHTS/ TRADES

The peak one-year ED calendar on the curve is now 76.5 bps, EDM23/M24 up from 70 bps last week.  The only inverted spread is EDZ1/EDH2 at -4.0, a sign that credit concerns could yet bubble to the surface. 

Comments last week were pretty much on the mark, if not conservative regarding new inflation projections.  About the dots I wrote…

All wrong.  All of them. All too low, starting in 2021.  There is talk that some dots will move up, given the vaccine progress and stimulus, and that investment committees will convene and, in careful consideration and deliberations will react to this change in official circumstances… by puking bonds.  I wouldn’t be surprised to also see Core PCE Inflation projections move up by 1/10 each in 2021 and 2022. [Core PCE projections were actually adjusted upward by 0.4 in 2021 to 2.2 and 0.1 in 2022 to 2.0].   The question is whether the existing shorts will take such an opportunity by covering some positions, or whether they will press.  I expect the latter. 


On the curve I wrote:

On 5-March, red/gold euro$ pack spread ended at 157, a new high.  I suggested targeting 175 to 185.  On Friday this spread (which will now be the old red, vs old gold pack, as March contracts roll forward) settled 162.625. 

Red/gold pack spread actually settled 177.125 on Friday, in the target area.

From last week:
FFN1/FFN2 settled 2.0.  No one thinks the Fed can hike by June 2022.  I do; it’s 15 months away.  For comparison, FFV1/FFV2 which I had recommended buying for 3, settled 8 on Friday.  

FFN1/FFN2 settled 5.0.

3/12/20213/19/2021chg
UST 2Y14.914.7-0.2 w/I 15.5/15.0
UST 5Y84.587.63.1 w/I 90.0/89.5
UST 10Y163.2172.69.4
UST 30Y239.9244.84.9
GERM 2Y-68.7-69.5-0.8
GERM 10Y-30.6-29.41.2
JPN 30Y68.766.7-2.0
CHINA 10Y325.9323.7-2.2
EURO$ M1/M29.09.50.5
EURO$ M2/M345.544.0-1.5
EURO$ M3/M470.076.56.5
EUR119.55119.07-0.48
CRUDE (active)65.6161.42-4.19
SPX3943.343913.10-30.24-0.8%
VIX20.6920.950.26

http://creditbubblebulletin.blogspot.com/

Posted on March 21, 2021 at 8:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Countertrend?

March 19, 2021

–Yields jumped yesterday with tens up 9.6 bps to 1.728% at futures settle.  Curve made new highs with 2/10 up 6.6 to 157.  Red to gold euro$ pack spread (2nd to 5th year) also rose just over 6 bps to a new high of 172 bps.  It has been a dramatic yield increase in the past one and a half months.  For example, EDU25 (the second gold) was 9875.5 on February 1, and settled 9794 yesterday, over 80 bps.  But it’s still only just over 2%, in a world awash with liquidity where commodity prices have been surging.  Philly Fed prices were 75.9, the highest since 1980.  The main index was 51.8 from 23.1, the highest since 1973.  Even if these numbers are outliers, the trend in other data has been in the same direction.
–At settle, CLK1 was down 4.57 to 60.06, with many pointing to renewed covid lockdowns in Europe as the catalyst for profit taking after a torrid rally from Feb thru mid-March.  This rally had corresponded with the rise in yields, so a countertrend rally in US fixed income wouldn’t be surprising.  
–BOJ widened the bands for long term yields from 20 bps to 25 bps, and tapered guidance on ETF buys.  Kuroda: “…we will ensure any moves won’t diminish the impact our yield curve control policy has in stimulating the economy.”  Reassuring.
–Equity option expiration today.  Nasdaq featured a 3% dump yesterday, though it’s still above levels from earlier in the month, so the burden of proof still falls on the bears at this point.  

Posted on March 19, 2021 at 5:23 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Trying to square inconsistencies

March 18, 2021

*POWELL: RATES WERE AT ZERO FOR 7 YRS WITHOUT FINANCIAL EXCESSES
….not with wartime gov’t spending!!!

–Powell will be gone in February.  I didn’t watch the press conference, so I am just relying on projection materials and dots, and it seems as if squaring the actual projections with the idea of keeping funding rates at zero would be a magical task.  In December, the projection for PCE inflation was 1.8 for 2021.  Yesterday it was bumped up to 2.4!   Core PCE inflation from 1.8 to 2.2%.  GDP from 4.2 to 6.5.  Unemployment from 5.0 to 4.5.  The Fed is projecting a [temporary] boom.  If these estimates are anywhere NEAR correct, and the Fed attempts to hold FF near zero, then long rates will surge.  The projection materials indicate conditions for ‘liftoff’ by the end of THIS YEAR. As market lore says (most recently Bianco) the Fed stays the course until something breaks, which is what occurred at the end of 2018.  As soon as Powell is replaced as chair, the Fed will be raising rates, if not sooner.
 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20210317.pdf

–Don’t take my word for it.  Look at the net changes at the back end of the euro$ curve (4th and 5th years, blues and golds)
blues:
EDM4 9866.0 +4.0
EDU4 9850.5 +3.0
EDZ4 9836.5 +2.0
EDH5 9824.5 +0.5

then the golds…same magnitude, opposite sign
EDM5 9813.5 -0.5
EDU5 9803.5 -1.5
EDZ5 9792.0 -3.0
EDH6 9783.0 -4.0

All of the back one-year calendar spreads rose at least 4.5 bps.  Of course, 5/30 leapt to a new high of 166.5 (at futures close) up 10 bps with fives down 5.3 bps to 77.1 and thirties up 4.7 bps to 243.6.  Unsurprisingly USM is printing new lows as of this writing at 153-28.  The recent dynamic is that a steeper curve weighs on tech, so Nasdaq may see additional pressure that could stem selling in the long end.  It will likely be a seesaw pattern lower for both, and quite difficult to maintain core shorts.  But something is going to “break”.

–EDU1/EDU2 settled 12.5.  From this, we might call the odds of a 25 bp hike 50/50 within that time frame.  The peak one-year calendar is EDM23/EDM24 at 71.5, which has the added feature of straddling the end of libor, so saying that this spread projects 3 hikes over that time frame isn’t quite right.  The point is that Powell has sort of boxed himself in, while the dots indicate that not all members agree with the “zero forever” mantra.     

Posted on March 18, 2021 at 5:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options