Equity in Household Real Estate Growing

March 16, 2021

–Rate futures retraced a part of Friday’s sell off, with tens down 2.5 bps to 1.607%. Large trade in dollars was a buy of about 45k 0EU 9962.5p for 7.5 covered 9967.5 with 40 delta.  Settled 7 vs 9968.0; the straddle settled 19.5.  I looked back to September of last year (prior to the libor extension announcement), and the 0EU 9975^  was the exact same price, 19.5, with 6 months of additional time value.  Clearly premium is reflecting a much healthier distrust of certainty for the path forward, though vol eased slightly yesterday.  The underlying contract on the 0EU put buys is EDU’22, which expires in 18 months.  It’s highly unlikely that the FOMC meeting tomorrow could signal tightening in that time frame, however, it is completely plausible that forecasts for 2023 move higher.–Today’s news includes Retail Sales, expected -0.7%.  
–The NY Fed released a Credit Survey (SEC Credit Access) which noted, 

The The mortgage refinance application rate reached a new series high of 25 percent (of households with a mortgage), up from 16 percent in October 2020.

·         The overall rejection rate for credit rose slightly from 18 percent to 19 percent, the highest reading since October 2018. Rejection rates for new credit card applications and for requests for credit card limit increases reached new series highs, while those for auto loans were at a series low. Mortgage refis likely to slow with the move to higher rates.  It’s somewhat interesting that credit rejections are increasing even as the economy re-opens.

–I’ve attached a chart which I find surprising: Households: Owners Equity in Real Estate as a % of HH Real Estate.  This chart shows equity at over 65%, the highest since 1990!  This is an indication that leverage in the Household sector in aggregate isn’t all that high.  In fact, the home ownership rate at 65.8% is higher than it was in the 1990’s, though below the peak of 69.2% in 2004.

Posted on March 16, 2021 at 5:24 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

The Ides

March 15, 2021

–Strong China economic data due to low base year-ago data.  Industrial output +35% and Retail Sales +33.8%.  In the US Goldman has raised its GDP forecast to 8% in 2021, and calls for an unemployment rate of just 4% by the end of the year.  It’s little wonder that analysts are expecting the Fed to increase projections on growth, and for the ‘dots’ to reflect a more aggressive timetable for a hike.

–On Friday, tens jumped 10.9 bps to 1.632%.  The new red/gold pack (using June as first contracts) surged 8 bps to nearly 163.5, as the gold pack sank 11.625.  The thirty year bond yield ended at 2.4% having doubled in yield since August.  Fortunately, mortgage and corporate yields remain tight, because a doubling of interest servicing costs could send some shivers through financial markets…at some time in the future.  Implied vol surged in treasuries, with atm TYJ 131.75^ settling 1’10, just over 6.1 using 12 dte.  

–Retails sales tomorrow expected -0.7%.  I’ve seen a bunch of headlines citing Stripe’s valuation at $95 billion.  This is an online payment processing company, and that valuation puts it in the neighborhood of American Express ($120b) and about triple DFS (Discover).  Of course, V, AXP and DFS are all at all-time highs.  

–RIP Jack Sandner, former CME Chairman.   That picture shows the ED pit, from the options (at left, cut off) to reds, greens and blues all the way in back.  As it’s close to St Patrick’s Day, I’ll never forget when Jack was giving a floor tour to the Irish Prime Minister, (I believe Mary Robinson) and the O’Callaghan brothers got a picture with her.  One of their acronyms was IRSH, short and jovial with thinning sandy reddish hair.  Don’t think I’ve ever seen anyone happier in a photo op! 

Jack Sandner on the trading floor of the Chicago Mercantile Exchange in 1997.
Posted on March 15, 2021 at 5:39 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Holy Frijoles

March 13, 2021 – Weekly comment

I saw three headlines this week that I am trying to wrap my head around.  First, Household Net Worth was reported to have ended 2020 at a record $130.155 trillion, up by a whopping $6.9T in Q4.  Annual GDP is only $21.5T.  This net worth figure comes from the Fed’s quarterly Z.1 report (link below).  Then, there is the story about a piece of digital art, “Everydays – The First 5000 Days”, by the artist “Beeple” that sold at Christie’s for just over $69 million dollars.  Finally a friend sent me an article about Taco Bell launching a collection of crypto art NFTs for $1 each to celebrate the return of potatoes to the menu, some of which are now selling for thousands of dollars on, what we in the business refer to as, ‘the secondary market’.  No, the potatoes aren’t selling for thousands.  The NFTs.  BC suggested I use the Taco bell bit in my missive.  He was joking.  I am not.

When I was a kid, I had a piggy bank.  Mine wasn’t a pig though, it was a cast metal horse, with the coin slot in the middle of the saddle.  I still have it, somewhere.  Later, my mom took me to the bank to open a savings account.  Pretty exciting day, going to the teller window in Berwyn with cash, and getting a little passbook back showing my name and deposit.  It was probably less than twenty dollars.  That’s money to be put aside.  Money that you can’t spend now, that you can’t really get at easily. 

Now, I must assume that someone lists their digital artworks as ‘assets’ and that ‘assets’ are a part of household net worth calculations, offset by liabilities or loans.  So, I buy a piece of taco bell crypto art for $1.  Sell it for $1000, and the clown that bought it lists it as an asset of $1000.  My wealth has increased.  The aggregate net worth of the US Household Sector has risen.  Can I possibly be framing this correctly?  If Christie’s is selling this crap for $69 million, I think I am. 

Ok, back to the savings account and the markets of today.  My working theory is that savings are dollars held aside today for future consumption.  There has to be a price, a benefit, in delaying immediate spending.  Otherwise, the incentive is to go find the next NFT or digital sports clip and spend some stupid amount for it.  My conclusion, therefore, is that the price of withholding savings for future consumption is too low.  By a lot.

Let’s bring it back to the markets.  Bond futures settled at new lows on Friday.  The yield on the 30 year treasury ended at 2.4%.  Investors, or savers, put money into bonds in a delay of present spending.  That yield, although its recent ascent is being looked upon with trepidation in institutional money markets, is too low.  Not only that, if our previously mentioned ‘investor’ borrowed money on his credit card to buy his NFT, and if he sees that similar works are now trading for $1500, his net worth has increased by $500.  He has an asset valued at $1500, with a liability of just $1000.  Of course, that debt, backed as it is by an NFT, is someone else’s [worthless] asset. 

At this point, I figure it’s appropriate to add a definition of NFT, which I got from google:

An NFT is an asset verified using blockchain technology, in which a network of computers records transactions and gives buyers proof of authenticity and ownership.

Just because you use blockchain technology to verify that you own a piece of sh-t, doesn’t make it any more valuable.  Just so that you don’t think I’ve gotten [more] stodgy, here’s another feel good story:

Rapper Azealia Banks sold her audio sex tape with her fiancé Ryder Ripps for $17,000 as an NFT, or a non-fungible, token, which essentially allows individuals to sell digital objects as one-of-a-kind via cryptocurrency. Now, the sex tape is being resold for over $260 million.

This, from a site called Insider, which I have linked below. I think it’s real.  It’s on the internet.  A friend sent me a chart that was from Gundlach’s Doubleline presentation.  Investment grade debt in real terms is negative. (Thanks MJ).  From 2015 through 2018 this real yield was positive, ranging from 1.5 to 2.0%.  Investment grade borrowers are essentially being paid to borrow.  That’s what a negative real rate means.  Any ramifications to growth, or perhaps, froth in speculative assets from that?

OK, so I have a proposal, we start a SPAC which invests in NFTs.  The portfolio of NFTs is to be highly diversified including pieces of art, sports clips, and the occasional sex tape in the name of inclusivity.  Though some of the assets may be of dubious value, they are all unassailably backed by blockchain technology, so the ratings agencies feel compelled to list our bond offering at AA.  And we can borrow at LESS THAN THE RATE OF INFLATION. I think we can christen this new enterprise under the “HowYaLeft” name.  Of course, I already own howyaleft.com which I would be happy to part with… for a tidy sum.  I will transfer ownership to the SPAC.  However, I want to be paid in GOLD.  *Other partners in side conference: “Can you believe it?  This idiot is willing to exchange digital assets for gold” *

Another couple of interesting tidbits from the Z.1 report.  In 2007, Household Home Mortgages topped at $10.625 trillion.  At the end of 2020, we’ve finally just surpassed the amount of HH Mortgage debt outstanding, at $10.935 trillion.  Houses are worth a lot more these days, so of course that contributes to the increase in HH Net Worth, given stagnant mortgage debt.  Now, for the sake of comparison, let’s take a look at Federal Gov’t Debt.  In 2007, it was $6.074 trillion, less than 2/3rds mortgage debt outstanding.  At the end of 2020, it is $23.621 trillion, more than twice mortgage debt outstanding.  When we see that mortgages are tight to govies, there might be a good reason, even ignoring the Fed hoovering up MBS.  Take a look at your elected officials.  What’s more risky, a mortgage backed by a house, or lending to the House?

Once again, we look at Friday’s midcurve option expiration, with Blue March midcurve puts having expired with 907k open interest, which now goes away.  Blue midcurves weren’t all that popular a year ago.  Of course, just over one year ago, in the month of February 2020, the red pack to blue pack spread (2nd year forward to 4th year forward) averaged just above 11 bps.  On Friday, reds to blues were over 121 bps, a new high. So there has been quite a bit of steepening.  In fact, it was October of last year that featured a lot of the initial interest in buying blue March (3E) put structures.  One dilly was the October 9, 2020 buy of the 9900/9912ps vs 9975/9987cs, paying 0.25 for the put spread in 50k ref EDH’24 price around 9946. This wound up trading well over 100k, adding a big chunk to 3EH OI.  EDH’24 settled Friday at 9875.  3EJ, K and M on EDM’24 now have 1.475 million puts combined, and 3EN, Q and U on EDU’24 have over 800k. 

The peak one-year ED calendar on the curve is 70 bps, with EDH23/H24 and EDM23/M24 tied at that level.  These are new highs.  Typically, one-year calendars widen in an environment of the Fed easing from a high FF starting point:  near contracts swiftly fall in yield in reaction to cuts and expected cuts, while deferred yields fall much less quickly.  Now the forward one-year calendars are rising for the opposite reason: expected future rate hikes.  The Fed generally cuts faster than it hikes.  So 70 bps is high for a far forward one-year calendar.  If one were to assume the 2004/06 guide of 25 bps hike per FOMC meeting, with eight meetings a year, then 200 bps in a year is doable.  But the market never prices certainty of all hikes.  On the other hand… Taco Bell NTFs.  It’s time to start thinking about the odds of a 50 bp hike in one shot in the not-too-distant future.  Chalupa.     

This week features Retail Sales on Tuesday, and the FOMC announcement and press conference on Wednesday. 


At December’s FOMC, the projection materials have the following dot plots.  In 2020 and 2021 all dots are at 12.5 bps.  In 2022 one errant member indicated a hike, with one dot at 37.5 bps and the rest at 12.5.  In 2023, there are 12 dots at 12.5, 3 at 37.5, 1 at 62.5 and the black sheep (who sees what’s actually happening), at 1.125.  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, to 1.9, and 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. 

UST 2Y13.914.91.0
UST 5Y78.484.56.1
UST 10Y156.7163.26.5
UST 30Y229.0239.910.9
GERM 2Y-69.0-68.70.3
GERM 10Y-30.2-30.6-0.4
JPN 30Y66.968.71.8
CHINA 10Y324.9325.91.0
EURO$ M1/M27.09.02.0
EURO$ M2/M345.545.50.0
EURO$ M3/M468.570.01.5
CRUDE (active)66.0965.61-0.48




Posted on March 13, 2021 at 9:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Honing my reasoning skills

March 12, 2021

–Tens settled essentially unchanged and bonds slightly lower as the Treasury completed the 30y leg of the auctions.  Post-auction, there was a buyer of some 70k EDZ22 at 9958.5 and a block buy of 4k USM 158-06.  While there was a temporary boost from these buys, it didn’t last.  As of this writing USM is 1.75 points  lower at 156-13 and EDZ2 is 9955.5.  One contact noted that EDZ2 buys could be flattening short deltas from a large long put spread/short call position.  In any case, EDZ2 was the peak volume across the ED curve with just over 400k traded. EDU2 was next closest at 323k, all else below 300k.  Z2 open interest rose 29k; it would have fallen if it were pure short covering of futures.  Apart from market stats like volume and open interest, the message is that large buys were faded; what appeared to be a big sigh of relief, having gotten thru CPI and auctions, looks much more tentative now with USM trading near the low for the entire move.

–Today’s news includes PPI with Core yoy expected 2.6%, and U of M inflation surveys.  Last time the 1-yr was 3.3%, highest since 2014, and the 5-10 yr was 2.7%, which equals the high from 2016 and 2020.  It might be worth noting that CLJ1 settled 66.02, just 7 cents shy of the high settle this month and less than $2 away from the March 8 high tick of 67.98.  I don’t know the window for the UofM survey, but the 3/1 close for CLJ1 was 60.64, and the price-at-the-pump increase in the Chicago area is noticeable in the past few weeks, as is the general pick up in traffic. 

–One last note is that the ten-year inflation breakeven ended at a new high yesterday of 228 bps.  I am not sure if tips are reacting to Fed buying or if there are other anomalies, but others had cited the 5-yr breakeven having pierced 250 bps last week.  The FT is all over it with this headline: ‘US bond market signals expectations for shortlived burst of inflation’.  I am personally getting a bit sick of the argument that inflation can’t possibly be sustained with slack in the labor force (though I don’t know if the FT is making that case since I didn’t read the article).  We are all aware of the phenomenon of pricing power returning when weak competitors fail.  When I think of finely crafted and well-reasoned arguments, I invariably fall back to Cliff Clavin in Cheers: 

“Well ya see Norm, it’s like this:  A herd of buffalo can only move as fast as the slowest buffalo.  And when the herd is hunted, it’s the slowest and weakest ones at the back that are killed first.  This natural selection is good for the herd as a whole because the general speed and health of the whole group keeps improving by the regular killing of the weakest members.  In much the same way, the human brain can only operate as fast as the slowest brain cells.  Excessive intake of alcohol, as we know, kills brain cells.  But naturally, it attacks the slowest and weakest brain cells first.  In this way, regular consumption of beer eliminates the weaker brain cells, making the brain a faster and more efficient machine.

That’s why you always feel smarter after a few beers. 

Posted on March 12, 2021 at 5:34 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Loosening conditions

March 11, 2021

–Biden’s $1.9t stimulus package passes…and DJIA makes new all-time high.  Treasuries firm going into and coming out of the ten-year auction, with the yield down 2.5 bps at 2.52%.  Implied vol crushed as CPI Core yoy prints at only 1.3%, probably the last low inflation data we’re likely to see over the next few months (or years).  TYJ atm 132.5^ still settled 1’08 with just two and a half weeks until expiry; not too long ago the atm straddle with four weeks to go was below one point.  

–Year to date fiscal budget deficit is up 68% from the year ago level, $1.047T vs $642B.  Clearly that’s due to COVID.  Of course, there’s a chance that fiscal support has artificially kept unemployment levels higher than they might otherwise be as the economy re-opens.  Perhaps the incentives driven by the large footprint of the federal government are undermining some of the very goals that the spending seeks to accomplish.  On the other hand, stocks are strong… but USD again turning lower.

–March midcurves expire Friday.  2EH 9950 straddle settled 5.0 vs 9949.  News today includes Jobless Claims expected 725k.  Thirty year auction today with w/i 224.5 at futures close.  April WTI Crude back above $65/bbl this morning. In dollars, greens continue to lead higher, closing +3.875, with blues +3.125 and golds +2.375.  Fives led the yield decline in treasuries, -3 bps to 79 bps.

Posted on March 11, 2021 at 4:56 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Bullet-proof? Maybe in Australia

March 3, 2021

–Stocks surged, the curve flattened.  Tens fell nearly 5 bps to154.5 before today’s auction (w/i was 155.5/155 at futures settle).  2/10 dropped 5.3 to 138.0.  A tweet from Stephen Spratt (BBG) this morning: “RBA has gone bullet-proof on yield curve control program.  By changing the repo borrowing cost for YCC bonds to 100 bps vs 25 bps normally, short selling just got incredibly expensive [on longer maturities]”  As I would interpret this, it’s like a targeted rate hike, something the Fed vows not to do.  Central banks appear to be open to ever-more proactive measures in an attempt to control rates.  However, control in one place often leads to unexpected results in others.  I think “bullet-proof” is overstating it, but I like the enthusiasm.

–The eurodollar curve flattened as well, with the red pack essentially unchanged and the golds +6.0.  Volume was light. Implieds fell.  EDU1/EDU2 one-year calendar edged to a new high of 14.5, up 0.5 on the day.  There continues to be heavy buying of 9975/9962/9950 put butterfly on the EDU2 contract.  On Monday +50k 0EQ version for just under 3 bps and yesterday it was the 0EU version which settled 2.75 vs unchanged futures at 9967.5 on volume >70k.  Breakevens are essentially 9972 to 9953.  These trades suggest reds are pretty much locked in, though higher inflation numbers could still create tension in this part of the curve.

–CPI today with yoy core expected 1.4%.  Ten year auction as well, followed by thirties tomorrow.  Monthly Budget Statement in the afternoon.  GO BIG.
–The attached chart shows June Gold (GCM1) overlaid with aggregate open interest.  It appears as though this year’s washout in gold prices has been accompanied by a drop in open interest (blue line), possibly indicated that weak hands have capitulated.  

Posted on March 10, 2021 at 5:40 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Nasdaq moving because of…futures?

March 9, 2021

–Nasdaq yesterday accomplished a 10% decline from February’s highs.  My first e-mail of the morning was from BBG, starting with “Tech shares get pummeled”.  Of course as of this morning, futures are surging back with NQH up 267, and some of the news sites are braying about a Nasdaq comeback based on….futures.  It’s a volatile market, subject to large move on no news.  Recently many have pointed to long term rates or curve steepening as a catalyst for Nasdaq weakness, and are noting that yields are a touch lower this morning…before CPI tomorrow and auctions of 10s, 30s, tomorrow and Thursday.

–Today we get NFIB expected 97 from 95 last, and $58 billion of three year notes, which were 35 bps late yesterday versus a 2-yr of 16 bps.  So there’s a decent amount of juice in that third year forward, which of course is reflected by the red/green euro$ pack spread (2nd to 3rd year) at a new high of 54 bps yesterday.  In fact, all euro$ one-year calendars from EDU2/U3 thru EDM3/M4 made new highs yesterday; the peak is EDH3/EDH4 at 72.5, nearly 3/4%, up 3.5 on the day.  

–Several large option trades suggest the market continues to pull forward the time for the start of Fed hikes.  An exit sale of 15k USH 157/153 put spreads from 1’24 to 1’20.  A new buy of 30k TYK 131.5/128ps for 45 to 47, settled 48  vs 131-28 with 34d.  And in dollars, a new buy of 50k 0EQ (EDU2 underlying) 9975/9962/9950 put butterfly for 3.0 vs various futures, settled 2.75 vs 9967.5.  The 10/30 spread declined by a few bps with the ten-year yield up 4 to 159.4, and thirties up just 1.6 bps to 230.3.  However, late in the day there was a block of +3500 UXYM 145-19 vs sale of 5410 WNM at 185-02.  Looks to me to be an extra $1.4m DV01 on the ultra bond.  Just because the long bond yield is now rising more slowly than tens, doesn’t mean yields stop going up. 

Posted on March 9, 2021 at 5:11 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Safe Havens

March 8, 2021

–“Hey don’t worry boss, I bought bonds AND gold to cushion any sort of unlikely sell off in stocks.”  As of this writing, USM is 156-16, -23, a new low.  GCJ is 1688.40, -10.1, a new low.  NQH is 12431, down 233, but just above last week’s lows.  Not too long ago, as bond yields hovered at all-time lows, the allure of holding fixed income for safety diminished significantly.  Some portfolios chose gold as an alternative port in the storm.  Others just used cash-rich big tech as their safe haven asset.  However, price action like this morning’s might change sentiment from TINA (there is no alternative) to WASH [OUT] (Where Are Safe Havens?).  The rise in yields and concurrent shift to an inflationary mindset make many asset classes vulnerable. 

–The passage of the $1.9 trillion spending bill might foster another price boost.  Oil, which was already in a solid uptrend, will likely be underpinned by yesterday’s attacks on Saudi oil infrastructure.  This, at the same time Netanyahu assured Harris that Israel would never allow Iran to have nukes, and the Biden administration’s recalibration of policy toward KSA ushers in uncertainty with regard to policy responses in the Middle East, (and everywhere else).  The problem is not Dr Seuss. We’re not in Solla Sollew. “And I learned that are troubles/Of more than one kind/Some come from ahead/ And some come from behind.”

–Sort of leaves physical supply of necessary commodities as the last true safety play.  Which, of course, encourages hoarding.  

–Many curve measures closed at new highs Friday, with vol snapping back.  2/10 ended 141.5, a new high up 0.6 on the day.  Red/gold euro$ pack spread closed 157.125 also a new high.  The peak one-year eurodollar calendar is EDH3/EDH4 which straddles the libor end date, at 69 bps.  There have been times when one-year calendars have peaked well over 200 bps, but these were periods of the Fed either slashing or being expected to slash funding rates from much higher nominal rate regimes. However, we’ll see triple digit one-year calendars before long.  

Posted on March 8, 2021 at 5:25 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Fed: transitory. Market: Not transitory

March 7, 2021 – Weekly Comment

For a while, I was using 2018 as a guidepost for levels regarding economic activity and prices.  This was the euphoric period following Trump’s tax bill, when the Fed was in the process of simultaneously tapering and raising the FF target, i.e. ‘normalizing’.  Last week, data from ISM Mfg and Services surveys showed prices have easily eclipsed 2018, with comparisons now going back to 2008.  By the way in 2018, the Fed hiked the FF target in June to 1.75-2.0%, in Sept 2.0 – 2.25%, and in December 2.25 – 2.5%.  The current ten-yr yield is only 1.55%.

The markets and the Fed don’t have any dispute about the path of prices in the near term.  They are going up.  The critical issue is whether general price increases are sustained, leading to accelerating inflation, or are transitory.  The Fed of course, is in the latter camp.  Powell has made more than a few comments indicating that’s his base case.  For example, regarding the semi-conductor chip shortage that idled some auto manufacturing plants, he said the prices might go up for cars in the short term, but inflation is a year after year increase in prices, and he didn’t expect that.  Same thing with respect to housing: covid altered people’s preferences for housing which led to a temporary increase in prices.  Both Brainard and Powell referred to base effects in the past week, but deemed them transitory.

The market, on the other hand, is leaning heavily toward the idea of accelerating prices.  Not only will the Fed get its 2% target, but there is overt concern that the target will be exceeded.  By a lot.  For the second week in a row, many curve measures finished at new highs.  Premium levels fell in the early part of the week but roared back on Friday.    I am updating the data I used last week:

                                2/19                       2/26                       chg to 2/26          3/5                         chg 2/26 to 3/5
2/5 treas spd     46.5                        59.7                        13.2                        64.5                        4.8
10/30 treasury  79.2                        74.1                        -5.1                        73.3                        -0.8

Red/Grn ED        34.375                   50.875                   16.5                        51.5                        0.625

Grn/Blue ED       56.125                   58.625                   2.5                         62.75                     4.125
Blue/Gold ED     46.125                   37.25                     -8.875                   42.87                     5.625

Let me mention a couple of levels I was involved with in ED’s.  EDM2 9900p, paid 2.5 ref 9976.0 on Thursday.  Settled 2.75 vs 9977.0.  These are 1 ¼ years away.  Consider the levels: EDM2 is 23 bps vs current 3-month libor around 18.  The futures market is more or less taking the Fed at its word of no hikes within a couple of years.  One might think 1 bp would be a more appropriate price for the 1% strike, but demand for protection has increased. 

On Friday EDU2 9900 puts traded 5.0 and 5.5 ref 9967.5/68.  They settled 5.5 vs 9970.0.  Again, the futures price, which is a year and a half forward, is just 12 bps above the current libor rate.  On Friday prior to the NFP release, there was a buyer of >30k 0EU 9962.5 puts for 6.0 to 6.5.  Settled 7.0 vs 9970.0 with an increase in open interest of 63k.  These midcurves settle on 10-Sept 2021, and at 7, the breakeven is, of course, 9955.5, or 44.5 bps, just over ¼% away from the current libor marks. 

These are some pretty juicy levels, but maybe they’re not juicy at all if the Fed is thrown into another round of disarray.  The Fed agonizes over past mistakes in order to avoid repeating them.  In 1994, they hiked too rapidly and caused the tequila crisis.  (There were probably other issues, but I happen to like tequila).  I recall a big bond local Tom Baldwin, who initially faded the move, but then just shrugged and said the waves of bond selling were obvious and decided to jump on.  In the 2004 to 2006 hiking cycle the Fed was entirely predictable and slowly boiled the frog, hiking 25 at every meeting, though I don’t think they’ve ever re-examined that flattening episode in the context of a mistake.  The recent repo surge in 2019 caused a slew of soul-searching papers and comments from the Fed…something NOT to be repeated.  In 2018, hiking while ratcheting up the taper was a mistake that resulted in the hard equity break at the end of that year.    

I feel as if the current period, with the Fed having changed its framework in August of 2020 and focused on employment rather than inflation, all at a time when fiscal jets are firing and covid is on the wane, is going to be the mother of all mistakes.  The Fed is well aware that official yoy inflation data is going to ramp up, in part due to base effects from last year’s March and April data falling out.  Just as a small example of how yoy figures can be impacted, Reuters reported that China’s “Exports in dollar terms skyrocketed 154.9% in Feb compared with a year earlier…”

These are difficult levels to short fixed income, especially in light of the magnitude of the move so far.  News articles are rampant about treasury fails and the -4% repo rate.  The Fed is promising to keep rates low and has the YCC bazooka in the back pocket for now.  While the SLR exemption is expected to expire March 31, there are other measures the Fed could initiate to entice banks to buy treasuries.  The RBA increased its bond purchases last week and Kuroda at BOJ made comments to stop the rise of Japanese yields.  However, market flows are telling you to initiate shorts.

The two over-arching issues are inflation (boosted by growth) and supply.  ZH had an article citing mining.com about lithium carbonate prices being driven by battery demand.  “Benchmark’s global weighted average lithium hydroxide prices are up 8% ytd…”  “While lithium’s majors are beginning to reengage in expansion plans, three years of falling lithium prices have failed to incentivise sufficient investment into the supply chain…”  There is one article after another highlighting this dynamic: lack of investment in productive capabilities because low rates made financial engineering more profitable.  Now supplies become an issue as demand ramps up.

WTI crude ended the week over $66/bbl.  CPI and PPI are released Wed and Friday, with Core yoy expected 1.4% and 2.6% respectively.  Treasury auctions 3s, 10s and 30s this week in the amounts of $58b, $38b, $24b.  FOMC is March 17, the Fed is now in the quiet period.

UST 2Y14.313.9-0.4
UST 5Y77.178.41.3
UST 10Y145.1155.410.3
UST 30Y218.0228.710.7
GERM 2Y-66.3-69.0-2.7
GERM 10Y-26.0-30.2-4.2
JPN 30Y75.166.9-8.2
CHINA 10Y328.0324.9-3.1
EURO$ M1/M28.57.0-1.5
EURO$ M2/M344.545.51.0
EURO$ M3/M465.068.53.5
CRUDE (active)61.5066.094.59
Posted on March 7, 2021 at 8:20 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Powell deflated

March 5, 2021

–The market wasn’t overly impressed with Powell’s delivery yesterday.  Curve steepened to new highs, stocks took a tumble.  EDZ’25, the 20th quarterly contract or last gold, settled 9799.5 (down 10.5), the first settle above 2% since July 2019 when the FF target was 2.25 to 2.50.  The red/gold euro$ pack spread has been exploding and settled 156.5 bps, up 9 on the day, which is about halfway from the 2013 high of just over 300 bps to the late 2018 low of just under zero.  2/10 ended at 141, up 8 bps to a new high.  The ten year yield finished at 154.8, up 8.1.

–Implied vols perked up appreciably, and treasury options have become quite a bit looser in the past several days.  With just three weeks left, TYJ 132.5 atm straddle settled 1’29 or 5.6 vol.  In more ‘normal’ times the atm straddle is around 1 point with one month to go.  

–A lot of buying once again in EDU2/EDZ2 calendar with volume of 125k in that spread alone with a late quote of 13.5/14.0 (13.5s).  I suppose a part of it is the turn, although the Sept/Dec/March fly has been fairly well behaved, settling at 3.5.  Current 3-month libor is around 18 (it’s bouncing around that level).  EDZ2 settled 9956.5 for a spread of 25.5.  There’s your first expected hike (which the market will continue to move forward as inflation figures accelerate).  CLJ prints a new high of $65/bbl this morning.

–Employment report today to cap a busy first week in March.  NFP expected 200k from 49 last.  YOY Avg Hourly Earnings expected +5.3% from 5.4 last.

Posted on March 5, 2021 at 5:27 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options