Oct 16. Industrial commodities firm

–Weaker than expected CPI Friday sparked a rally in fixed income with Core +0.1 (yoy +1.7%). Curve flattened to new lows for the year, with 2/10 at 78.5 bps, -2.3 on the day, and red/gold pack spread at 40.375, -2.0 bps, as golds were +5.0 on the day. EUR a bit weaker this morning as Austria elected a new anti-immigration leader and the Catalan situation simmers. Copper has exploded to a new high this morning, perhaps in part due to PBOC’s Zhou calling for 7% growth in the second half in front of this week’s National Congress meeting. Crude oil is also rallying, up 0.67 this morning and over $52/bbl, poised to test last month’s high at 52.86.

–Yellen this weekend called inflation a surprise but expects a gradual rise.
–Front end of the curve remains steep with EDZ7/EDH8 closing at the high of 13 bps while one year away, that is, EDZ8/EDH9 is only 4.5 bps. EDZ7/EDM8/EDZ8 butterfly settled at a new high of 8 bps, with Z7/M8 23 bps and M8/Z8 at 15.0. That fly has had an amazing run-up from -4. While January FF still indicate around 75% odds of a hike in December, Feb/April FF spread (which isolates the March 21 FOMC meeting), closed at 9.0 bps, more or less pointing to odds of 1 in 3 for a hike at that meeting. There will be a new Fed chair by then; note that the March FOMC date is the week after expiration for EDH8.

Oct 15. Channeling Tillerson

Here’s a quote from the blog of a famous central banker:

“The unpopularity of inflation may be due to reasons that economists find unpersuasive, such as the tendency of people to focus on inflation’s effects on the prices of things they buy but not on the things they sell, including their own labor.”  Ben Bernanke

Usually I add links to the bottom of the note, but this snippet is so unbelievable that you might think I’m making it up.  I’m not.  I guess BB thinks all prices, including labor, go up at exactly the same pace.  Here’s the link:

https://www.brookings.edu/blog/ben-bernanke/2017/10/12/temporary-price-level-targeting-an-alternative-framework-for-monetary-policy/?utm_campaign=Economic%20Studies&utm_source=hs_email&utm_medium=email&utm_content=57336815

The real life problem that Bernanke seeks to address in his theoretical musings is that, in case of another downturn, the Fed needs policy space to respond.  And, to be fair, Ben gets in early on some of his ideas.  For example, in November of 2002 he gave his famous, ‘Deflation: making Sure ‘It’Doesn’t Happen Here’ speech. [One interesting line in the speech is “Today, an ounce of gold sells for $300, more or less.”  GCZ17 settlement Friday: $1304.60.  So gold’s gone up about 10% per year].  This speech also had the infamous line “But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

In this week’s paper, Bernanke talks about the concept of raising the inflation target, and then draws a distinction between inflation targeting and price-level targeting.  He mentions the idea of the Fed having to communicate its policy and educate the public.  At one point he blithely says, “Instead, following the inflation-targeter’s approach, the Fed would simply guide inflation back to target over time.”

Um, the problem is that the Fed is having trouble ‘simply’ guiding inflation.  If anyone ever sought to write an eloquent paper that drives the public to the inescapable conclusion that the Fed should just follow a rules based policy instead of theoretical mumbo jumbo, Bernanke made the case. In spades.  Fed officials constantly defend their subjective policy making, saying that the economy has so many nuances that it takes the superior assessment of seasoned bankers to guide the economy through rocky shoals.  But the Fed hasn’t been able to hit its inflation target.  The dots are consistently wrong.  Fed officials openly acknowledge they’re not quite sure what’s going on.  Circling back to the sentence at the top of this note, the reason the public doesn’t like inflation is because the price of the labor they sell IS NOT GOING UP AS QUICKLY AS PRICES OF THE THINGS THEY NEED TO BUY.  Is that persuasive enough for an economist?  It’s the core issue.  Wages aren’t keeping pace with, well, let’s just refer back to our earlier example of gold, which has gone up 10% a year.  The end result is income inequality.  If Tillerson read that paper he might call the author… ahem, well…he might mutter something under his breath.

Look, I think inflation is going up.  I think the Fed (and markets) may be caught by surprise, notwithstanding comments from Fed Presidents like Bostic, who said last week, “On balance, the limited market reaction to the rollout of the Fed’s new balance-sheet policy leads me to conclude that financial market participants do not view it as a significant tightening of conditions or a hindrance to economic growth.”  In contrast, Brevan Howard announced a new fund “…to bet on both a steepening of the US yield curve and an increase in curve volatility.”  I’ll go with BH on this one.

In terms of launching a contrarian fund for increased vol and a steeper curve, the market is kindly sending an engraved invitation.  This week yields fell and the curve closed at the low of the year, actually, at the lows since the great financial crisis.  In treasuries, 2/10 ended the week at 78.5 (started the year at 124).  5/30 closed 90.6 (started 113).  In eurodollars, red to gold pack spread (2^nd to 5^th year) settled just over 40 bps (82.5) and the red to green pack spread (2^nd to 3^rd  yr) at just over 14 bps (39).  From VIX to treasuries, vol remains pinned to the mat.  Stocks are at all-time highs and consumer sentiment this week ticked at the highest level since 2004.

However, given the Fed’s balance sheet reduction schedule, and suggestions that the ECB might cut its purchases in half next year to 30B EUR month, it will likely be sometime in 2018 that the ECB’s buys intersect with the Fed’s sales in terms of quantity.  Possibly around the US midterm elections.  That’s not to say there will be an absence of growth in central bank assets.  We still have the BoJ, and China’s societal funding is still increasing as a % of GDP.  But the change in trajectory will be obvious.

In terms of the actual target of Tillerson’s collegial nickname, President Trump is throwing a lot of darts at once.  Although I’m sure no one could accuse Donald of hubris, his repeatedly taking credit for creating $5 trillion in stock market cap is sure to come back and bite him in the ass.  Because that’s what markets do.  Oh sure, there are times when passive management reigns, both on an economic and a societal plane, but then the cracks begin to show.  I can’t do justice to this theme; I’m just another broken record.  However, I’ll refer to an Op-Ed in the South China Morning Post (linked below) by Andy Xie, which is chock full of interesting tidbits.  Below are a couple:

The mistaken stimulus has the unintended consequences of dissipating real wealth and increasing inequality. American household net worth is at an all-time high of five times GDP, significantly higher than the bubble peaks of 4.1 times in 2000 and 4.7 in 2007, and far higher than the historical norm of three times GDP. On the ­other hand, US capital formation has stagnated for decades. The outlandish paper wealth is just the same asset at ever higher prices.  

In tier-one cities [in China], property costs are likely to be between 50 and 100 years of household income. At the peak of Japan’s property bubble, it was about 20 in Tokyo. China’s residential property value may have surpassed the total in the rest of the world combined.

Paraphrasing Tillerson…

In today’s bubble, central bankers and governments are fools. They can mobilise more resources to become bigger fools.

Xie’s op-ed concludes: “The most likely cause for the bubble to burst would be the rising political tension in the West.”  He mentions midterm and presidential elections.  I would only add that there are a LOT of possible catalysts out there, and they seem to be multiplying.

NOTE: This week is the 30^th anniversary of the October 19, 1987 stock crash (where the Dow fell 22.6% in one day).  Of course, that was a time of program trading and portfolio insurance.  Nothing like that today…  Also, we’re lucky not to have any impulsive senior federal officials, like then Treasury Secretary James Baker, who publicly threatened to devalue the dollar in order to address the trade deficit. : – l

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https://www.frbatlanta.org/news/speeches/2017/1012-bostic-balance-sheet-normalization-in-us

http://www.businessinsider.com/brevan-howard-launches-fund-betting-on-us-treasury-market-volatility-2017-10?utm_source=feedly&utm_medium=webfeeds

Xie link  http://www.scmp.com/comment/insight-opinion/article/2114248/bubble-economy-set-burst-and-us-elections-may-well-be

Oct 13. FLATTER

Oct 12. The Morlocks

–Once again light volume and small ranges in interest rate futures.  The curve flattened with the two year yield +1.3 at 151.7, and the thirty year -0.6 at 287.5 (30 year auction today).  I marked 5/30 at 92.2 which is close to its recent low, and red/gold pack spread at 43.625, also near the year’s low of 40.25.  Large trade in 0EZ 9812/9800 put spread, 5.5 paid for 60k covered 9810.5.  Settled 5.75 vs 9809.5.  Open interest in the strikes +44k and +83k to 503k and 694k respectively.  Jan FF still indicate 80% chance of a hike in December, which means another 5 bps on an actual hike.  If that happened across the curve then EDZ8 would be near the lower strike.

–I didn’t read the Fed minutes, but clearly there’s still a debate about whether inflation will ever firm up again.  I would simply note that the dollar weakened yesterday (euro strength) and that the 10 yr tip breakeven edged to a new recent high of 189.1.  Gold is flirting with 1300 again this morning, while bitcoin surpassed 5000 for the first time and is up five fold on the year.  Remember the good old days?  It was early March of THIS YEAR, 2017, when Bitcoin first traded parity with gold, which was then at 1233.

–Both Brainard and Powell have an opportunity to fret about the lack of inflation today, both at 10:30.  Brainard on a monetary policy panel and Powell talking about Emerging Markets.  No inflation there.  EEM (Emerging mkt etf) was at 34 in late December of last year and is now 46, a gain of only 35%.

–Economic data includes PPI expected +0.4 and Core +0.2.

–One last note about price increases.  It was in late 2015 that the sickening slump in crude oil was close to its culmination.  So severe it was, that even stocks had a brief negative reaction.  Since that time (January of 2016), SPX is up around 41% and Nasdaq nearly 50%.  But you know what has trounced them both? (No points for saying bitcoin or the growth in the State of Illinois unpaid contractor bills).  Base metals.  The Bloomberg base metals index is +58% since then and near the high of the year.  Who could possibly have use for base metals in our digital social media world?  Oh yeah.  The Morlocks, who are toiling away underground making bombs.

Oct 11. Calm before the storm. Calm beneath the surface. Maybe it’s just calm

–“It’s shocking how little time is required to take a volcanic system from being quiet and sitting there to the edge of an eruption,” said Ms. Shamloo.   This quote is from an article on the supervolcano at Yellowstone.  “Scientists suspect that a supereruption scars the planet every 100,000 years…”  (And the VIX will still be under 10).

https://www.nytimes.com/2017/10/10/science/yellowstone-volcano-eruption.html

–Nothing but calm in rates yesterday.  Low volume, slightly flatter curve.  Green eurodollars the lead performer, closing +3 on the day.  There was a minor bid in treasuries associated with the Catalan withdrawal speech, which faded.  Euro this morning is holding yesterday’s gains at 118.10.  USD weak across the board yesterday.

–Crude oil had a strong bounce yesterday, CLX +1.36 late at 50.94 and has added another 50 cents this morning.

–Hurricanes, floods, fires and earthquakes.  And the Fed’s Kaplan sees the low ten year rate as “a little ominous” because it hasn’t risen.  Well, it probably WOULD have risen if the Fed hadn’t taken every possible step possible to make sure that nothing bad could happen from trimming the balance sheet.

–Today’s events include 3 and 10 year auctions.  FOMC minutes in the afternoon.

–Home Depot being forced to create video tutorials for the next generation of consumers, as millennials apparently are unsure about how to use screwdrivers and tape measures.  “So I wrote this code that arbs bitcoin on different exchanges to a basket of currencies that runs automatically across times zones….HEY! What do you call THIS thing?  A tape measure?”  Let’s hope that the next war is carried out completely in cyberspace. https://www.youtube.com/watch?v=M73r32vK7C4

Oct 10. Treading water

-While wage data in Friday’s employment report were reassuringly strong, with average hourly earnings +0.5, the payroll data were skewed by weather, and selling in treasuries was arrested as shorts closed positions. The market is now more or less treading water, though the euro is higher, partially in response to ECB board member Lautenschlaeger saying the ECB should trim asset purchases in 2018. The binary solution regarding Catalonia appears to have transitioned to a grey area, with several large companies saying they are relocating headquarters from Barcelona to Madrid.

–Press on Trump is rather negative, with the Corker twitter-spat causing some to re-evaluate the chances of a tax deal, however, there is no discernible effect on US stocks.

–NFIB small business optimism index this morning expected 105.4. This data has remained buoyant since the election, near 12 year highs. Kashkari speaks at 10:00. Treasury auctions of 3 and 10 year notes tomorrow, followed by FOMC minutes. 30’s auctioned on Thursday.

–January’18 FF contract at 9865 indicates 80% odds of a hike at the December FOMC. Jan’18/Jan’19 spread closed at 33.5. While that’s a recent high, it still projects well under two hikes for next year, probably too low.

October 8. Looking down the inflation barrel

The recurring theme from Fed officials is that inflation is too low.  Yellen is mystified.  Brainard is concerned.  Dudley thinks it will get back to 2% sometime soon.  Bullard thinks the downside surprise in inflation in the first half of the year is unlikely to reverse. The Fed as a whole wants the public to believe it can magically reach the 2% target and keep it there, partially through managing expectations (a variation on forward guidance), yet various Fed officials openly fret that they don’t exactly understand the interplay of inflation dynamics.  The problem is well known.  Wages aren’t growing sufficiently.  Capital expenditures haven’t been strong.  However, on Thursday Philly Fed President Harker said “Lack of skilled workers is a top issue for the economy.”  This comment was made at a workforce development conference, so perhaps it’s taken out of context, but the phrase “lack of” usually means “higher price”.

It’s pretty obvious that there has been inflation in equity prices, with all indexes making powerful new highs this week.  But there are some other fairly clear examples of higher prices in the economy, shown in the charts below.  The top chart is Prices Paid for both manuafacturing and service ISM released last week.  Manufacturing prices paid (white line) is at the highest level since 2011, and for services (amber), it’s the highest since 2012.

But without labor price increases, inflation can’t really be sustained, right?  Well, Friday’s employment data showed average hourly earnings at +0.5.  Below is a chart of yoy average hourly earnings, at a new high of 2.9%.  I have also included the Atlanta Fed wage tracker on this chart, which has been more volatile, but is still 3.4%.  I’ve helpfully drawn a red arrow, just to clarify that the general direction is up.

So there it is, in black and white.  For the Fed, maybe it’s getting close to the “Be careful what you wish for” warning.  It’s like a Road Runner cartoon.  Wile E. Coyote has packed the cannon with gunpowder (and then added more, just to be certain).  The road runner is a fast approaching speck in the distance; Wile E. lights the wick.  The sparkles fizzle just as the wick burns to the trigger and the road runner beeps and blurs by.  The plan is a dud.  The frustrated coyote looks down the cannon barrel to see what went wrong.  KA-BOOM!

The Fed has loaded up the balance sheet with gunpowder.  They lit the wick, announcing the onset of QE unwinding.  Now they’re examining the inside of the inflation barrel.  Obviously it’s hard to be right on timing.  But IF the main depressant on inflation is wages, and IF a top issue for the economy is lack of skilled workers, and IF wage growth is back up to 2.9% and further converges to the Atl Fed level, then there’s the possibility that the 2% target isn’t a cap.  Maybe it will blur right past.

Clearly, that outcome would be bearish for treasuries.  But there are a couple of other concerns as well.  One is, of course, fiscal spending related to clean-up for the barrage of storms.  Second is the potentially stimulative effect of tax reform proposals.  Also, the treasury this week released a blueprint for reforming regulations on capital markets.  One of those changes includes relaxing margin requirements on swaps and another expands the definition of high quality assets included in the liquidity coverage ratio.  At the margin, the implication is less demand for treasuries from a regulatory standpoint. [Link at bottom; summary on pages 210 regarding High Quality Liquid Assets, and 212 on Swap margins].  The eventual decline in the Fed’s mortgage holdings should also contribute to an increase in volatility on the longer end.  For a long time, and even until now, the curve reflects little in the way of an inflation premium.  5/30 remains pinned to its recent low of 92, closing the week at 94.  2/10 closed at the high of the week, but is still only 86 bps.  That situation may change.

This week includes auctions of 10’s and 30’s.  Mnpls Fed’s Kashkari  speaks, likely basking in the glow of having his name bandied about as a contender for the Fed Chair due to his unwavering dovishness.  PPI Thursday.  CPI and Retail Sales Friday.

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Oct 4. Budget out of whack? Wipe the slate clean.

–Stocks again went out on the highs as yields edged slightly lower.  Front eurodollars to reds were flatter, reds to deferred slightly steeper. (Whites -0.75, Reds +1.25, Grns +1.5, Blues +1.25 and Golds +0.875).

–Large buyer early morning buyer yesterday of 82k 0EG 9787/9762ps for 4.0 ref 9806.5 in EDH9.  Equivalent to about 14k futures sold.  However, the market easily absorbed the selling pressure and floated higher with EDH9 closing at 9808.5.  EDZ8 is still flirting with the 9812.5 strike where there is huge open interest; settled 9813.0.

–Interesting comment in the aftermath of Becky Quick’s interview with Warren Buffet: she said he was not selling anything and was waiting to see how the tax program might play out in Washington, that is, defer selling to get a lower rate. The equation comes down to, ‘how much of a tax saving vs how much the market rallies in the meantime.’  In any event, this line of thought likely removes selling pressure at the margin.

–On the other hand, regarding the tax program, Moody’s said it would consider downgrading the US if the plan was passed as proposed.  The President off-handedly said Puerto Rico funding is throwing the budget out of whack.  So I guess we should feel good about the tax program?  And then there’s this: “We are going to work something out. We have to look at their whole debt structure,” Trump said in a Fox News interview Tuesday. “You know they [PR] owe a lot of money to your friends on Wall Street. We’re gonna have to wipe that out. That’s gonna have to be — you know, you can say goodbye to that.”  It seems to me that governments typically aren’t that cavalier about dismissing debt obligations.  Coincidentally, the ECB is telling banks to set aside more money for bad loans.  http://www.reuters.com/article/us-eurozone-banks-ecb/ecb-tells-banks-to-set-aside-more-cash-on-bad-loans-idUSKCN1C90IW

(Maybe they’ve lent to PR!).

–An interesting piece on Zerohedge from Jeffrey Snider notes that treasury repo fails have been over $325 billion for the past three weeks, suggesting collateral tightness.  From the article “…potentially an escalating warning about systemic liquidity.”   http://www.zerohedge.com/news/2017-10-03/three-straight-weeks-cant-be-ignored

–Yellen gives opening remarks at a community banking conference.  Other news includes ADP expected 135k and Non-mfg ISM expected 55.5.

Oct 1. A bet for higher rates

Trump has been meeting with Fed Chair candidates and said an announcement is two to three weeks away.  The current Fed is leaning for a December rate hike, and the market is on board with that assessment, pricing odds of about 2 in 3.  There have been plenty of Fed speeches identifying the importance of inflationary expectations, relating incoming data to the trajectory of rate increases, and discussing the decline of R* (the real short term interest rate with unemployment at the natural rate and inflation at the 2% target).

The market appears to be pretty certain of a spurt of growth related to increased Federal and private spending for storm rebuilding, and is also buying into the idea that a tax plan will be passed.  Though opposition will surely grow due to projected increases in the government’s deficit, it doesn’t seem to have galvanized.

Let’s consider the longer term perspective of where rates are currently and the shape of the yield curve.  The ten year yield ended Friday at 2.32% and the thirty year bond at 2.85%.  In the past five years since 2012, the range on tens has been 3.02% to 1.36% (post-Brexit).  The halfway mark is around 220, and tens are just above that point.   The 2yr to 10yr spread at 85 bp is near its low since 2009.  While near one year euro$ calendar spreads have perked up (peak one-yr is now EDZ17/EDZ18 at 38.5), everything from EDM18/EDM19 on back is 25 bps or lower, signifying perhaps one hike per year.

The point is this: there’s a lot of pontificating about the fine points of monetary policy and how inflationary expectations might be nudged a bit higher.  But the interest rate market has NEVER believed in the Fed’s projections, and is currently priced somewhat tentatively  with respect to both growth and inflation.  Stocks are heartened by lower regulation, the tax plan, and low funding rates.  From a longer term risk/reward perspective, the bet has to be a move to higher ten year rates.  It’s just as simple as that.  The back end of the curve is NOT pricing much in the way of economic improvement or an increase in inflation.  What if both occur?

Given the 30 bp jump in the ten year yield over the past three weeks, and continued tension with N Korea and Catalan, there could easily be a bounce in bonds.  But the longer term perspective has changed.

A few weeks ago I wrote about Kevin Warsh as a possible Fed Chair candidate.  One of his concerns is misallocation of capital as a result of rates that have been repressed.  I agree with that viewpoint, and we’ve obviously seen corporations splurging on cheap financing to buy back their own shares (and dilute balance sheets).  Tangentially related is the idea that capital spending has been weak.  Well sure, if you’re buying back stock because rates are low and opportunities for growth seem scarce, forgoing capital investment makes intuitive sense.  Another Fed Chair candidate is Jerome Powell, a current Governor.  In one of his recent speeches he said low productivity was a concern. A lack of capex ties into the idea of low productivity.  To address this, the new tax proposal includes a five year window to immediately write off capital expenses.

The government is likely to spur spending (and increase the deficit).  Companies may thus see opportunities for growth and increase capex (according to the NFIB it’s already happening).  Rather than buybacks, companies may spend more on productive enterprises, and tax benefits will surely outweigh increases in interest rates.  There may be ‘pent-up’ demand regarding capital spending.

In terms of the Fed, I don’t think Warsh is going to be the guy.  There are 2 risks, one is that it will appear to be a favor to Ron Lauder (friend of Trump and Warsh’s father-in-law), and second, it’s probably not a good idea to rock the low-rate centrist boat at the Fed.  More likely to be Powell or Yellen.

A couple of other thoughts.

Bridgewater laid out 5 reasons raising rates was a mistake 1) Not enough inflation and risks of overheating are low 2) Risks are asymmetric to the downside 3) Tightening faster than built in to the curve are likely to trigger negative wealth effects because effective durations of assets are very long 4) Economic sensitivites to rate changes are greater than normal due to high global indebtedness and pensions/healthcare obligations, and 5) A downturn would be intolerable to those with lower incomes and wealth and will increase social tensions. [Summary from Business Insider]

That contrasts sharply with an assessment (on Bloomberg) by Brett Gillespie of Ellerston Capital.  “Inflation is going to jump dramatically in the next year.”  Economic modeling by Gillespie’s group suggests that a confluence of dynamics, from agriculture to energy, drove down the U.S. inflation rate in the middle of this year. That’s poised to change in coming months, sending six-month annualized gains in the consumer price index excluding food and energy to 3 percent, he said.

Let’s consider these two viewpoints.  First, Bridgewater describes the current environment, and postulates that rates can’t rise because it would be too painful.  As alluded to above, the curve just isn’t pricing it.  On the topic of misallocation, the argument tacitly accepts the idea that the Fed has forced investment into longer dated riskier assets and has suppressed yields to the point that pension and healthcare obligations can’t be met.  That’s ALREADY increasing social tensions.  Rate increases will cause a great unwind, and it won’t be pretty.  Well, things aren’t always pretty.

The other side suggests inflation may lead the debate.  Perhaps a bit dubious given last week’s release of Core yoy PCE at only 1.3%.  However, oil has been firming, the USD has been weak, and the Atlanta Fed Wage growth tracker, while having gone sideways this year, is still 3.4%. The dynamics of this particular line of thought need to be fleshed out, but the idea is not to take the Bullard stance and extend the idea of a persistent regime out into the future [link to June 2016 paper below], but rather to use the Druckenmiller idea of catalysts that may make the future look quite different from its current situation.

In terms of an inconvenient market movement consider this, 30 year JGB has been pegged all year between 75 bps and 90 bps.  (I prefer to watch 30y as BOJ caps tens below 10 bps).  This week it closed 86 bps.  A move above 100 bps would signal a problem.

There are a lot of Fed speakers this week including Powell on both Tuesday (Regulatory Reform) and Thursday (Treasury market), Yellen Wednesday, Dudley Friday after the Employment Report.  Other speakers include Kaplan on Monday, Bullard Wednesday, Williams and Harker Thursday, Bostic, Kaplan, Rosengren and Bullard again on Friday.

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https://www.federalreserve.gov/newsevents/speech/powell20170601a.htm

https://www.stlouisfed.org/~/media/Files/PDFs/Bullard/papers/Regime-Switching-Forecasts-17June2016.pdf

Sept 29. Out of ideas

–Main feature of yesterday’s trade was curve steepening, with notable buying in near eurodollars. Open interest fell in most contracts, suggesting end of the quarter unwind of flatteners. Whiles reds (2nd year) were +3.25, golds (5th) were down 0.5; the red/gold pack spread closed at 48.25. Still low, but a solid bounce over the last two days.

–There has been consistent buying of Nov TY 124.5 puts, which continued early in yesterday’s session (actually on Wednesday night; in the good old days would have been done on the floor in the Night Bond session!). In any case, I think prices were 14 and 19 paid in decent size. Open interest was up 30k to 145k, the most OI of any put on TY. TYX 124.5p settled 10 vs 125-17+. I reckon that strike to be about 13 bps away, roughly 2.43 to 2.44% on tens (closed 230.7). Against this, there continues to be selling of TYX 123.5p, settled 3. For the sake of comparison, TYX 126.5c settled 14 with a 25 delta, and 126.75c at 11 with 20d. Even though the open interest in puts is high, it’s not as though there’s a mad reach for puts relative to calls.

–Odds of a December hike remain at about 2 in 3 according to Jan Fed Funds. There was a seller yesterday of October ED 9850 straddle at 3.0 vs EDZ7 9851.5. That’s like the Seinfeld joke where a driver honks his horn at a pretty girl walking by…”There’s a guy who is out of ideas.” I’ll just sell this straddle and capture the 1.5 bps of time decay in the next two weeks.

–Personal Income and Spending expected +0.2 and +0.1 with Core PCE prices yoy expected at a tame 1.4%.

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

  The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.