Jan 25. End of week comment
A confluence of factors regarding emerging market problems sent interest rate futures screaming higher into the end of the week, with green and blue Eurodollars up 30 bps from Wednesday low to Friday morning high, though Friday’s settlement was about 8 off the high. Though implied vol typically declines on rallies, the abruptness of this move caught the market off sides and vol ended the week on its highs, with TY vol up 0.5-0.6. Fives made a new monthly high, closing 3.4. The scramble for safety was punctuated by a buyer of 50k TYH 125c on Thursday, though the same call was liquidated Friday. Open interest in Eurodollar futures was down a whopping 123k on Friday, with Z4 -37k, M5 -15k, H6 -25k and M6 -12k; another indication of unexpected liquidation. The story in the US has shifted from the domestic economy to international capital flows. As noted by Doug Noland of the Prudent Bear, “Backdrops conductive to crises can drag on for so long – sometimes seemingly forever – as if they’re moving in ultra-slow motion. Invariably, they lull most to sleep. Better yet, such environments even work to embolden the optimists. This is especially the case when policy measures are aggressively employed along the way, repeatedly holding the forces of crisis at bay. In the face of mounting risk, heightened risk-taking and leveraging often work only to exacerbate underlying fragilities. But eventually a critical juncture arrives where newfound momentum has things unwinding at a more frenetic pace. It is the nature of such things that most everyone gets caught totally unprepared.”
Green and blue at the money straddles were extremely well bid on Friday, with Green Feb 9862^ closing up 2 at 21.0 and Green March up 1.5 at 29.0. Feb and March atm straddles in blues are 22.5 and 32.5. As noted previously, green to blue straddles are nearly trading at parity. If the upside move continues we may start to see blues leading the way… Of course, given the outright move of 30 bps in both greens and blues in two days, it makes sense for these straddles to remain bid, especially as this week includes the FOMC meeting and China’s year end, with associated concerns about liquidity in general and a default in the Credit Equals Gold No 1 fund. (Almost sounds like a scheme that Seinfeld’s Kramer could have come up with: Kramerica’s fund of funds).
In spite of the bid at the money, a market maker friend of mine said the euro$ option pit in general does not want to own puts, citing as an example a local seller of 2EH 9837/9800 put spreads at 4.0 covered 64, which was worth 4.6 with the straddle set 29.5/30.0. Similarly he cited 2EM (green June) 9775 puts which were being made 6.5/7.0 when he showed 7.5 as value. As skew sellers hit the pit, locals adjust the downside lower accordingly, and appear to have excess inventory. One other note was buying in EDH4 9962p late Friday for 0.75, as front contracts closed lower on the day, reflecting at least a modicum of concern that funding pressures could spill over. EDH4 straddle settled 4.0.
VIX also exploded as stocks dumped. VIX closed at 18, having been sub-12 earlier in the month.
Jan 24. “Why, he stubbed his toe!”
“Well, that doesn’t make any sense. A man could stub his toe, take poison, fall down a well, break his neck, and crack his head open so that his brains fell out. Then someone would come along and ask what killed him, and some numbskull would say, “Why, he stubbed his TOE. What would be the sense in that? NO. There’s no sense in this either. Is it contagious?” Mark Twain from Huckleberry Finn
–It’s all about Argentina now…well not Argentina so much as all emerging markets and possible contagion. Argentina of course, devalued yesterday. S Afr Rand made new low, as did Turkish Lira, Mex Peso, and Aussie at new lows this morning. There are still concerns about possible fund default in China and tight money going into the end of the year. Etc. So there’s a confluence of events which wasn’t having much of an effect, until someone came in to aggressively buy 50k+ TYH 125c from 26 up to 32. I had thought it was covering, but maybe a cover and flip to long, a specialty of my first bond account Angelo F. In any case, that trade seemed to crystallize the idea of gathering risks as ten yr yield fell 8bps to 277 and green eurodollar pack, which had been the leader to the downside, exploded to +16 before settling +14.625. Implied vol in treasuries rose on the move, which is telling you something…
–2/10 at new low, though I marked with w/i 2 yr. But peak one-yr eurodollar calendar is now only 109.5 (EDZ15/16) which was down 2 on the day. And the red/green/blue pack butterfly which had exploded to +7 first thing in the morning came back to settle -1.75 as greens, well, shooted. Possibility of suspended taper due to EM concerns? FOMC meeting next week.
–Of course the smart, safe, money can go into AMZN, which did grudingly fall 1% yesterday after having rallied 50% since May, sporting a p/e of 1428 (no decimal), while Walmart has 1/100th of the p/e at 14.36 and a yield almost as high as the ten year note.
Jan 23. Nearer part of euro$ curve steeper as market ready to test Fed forward guidance
–Once again some huge trades…first, new highs and new lows. New highs in front to red one-year calendars as the market pushes up timing of Fed hikes. (For example EDZ4/Z5 up 3.5 to 80.5). New high in red/green/blue pack fly to 6 as red/green closed near 105.5 with green/blue 99.5. New low in 5/30 spread at 206.7 and in 5/10 at 116.8.
–Large put trades occurred once again on EDH16 and EDM16 underlying contracts, but interestingly there was also large put buying in nearer contracts, notably E0U5 9900/9875ps +50k 8-8.5 (against which was sold mid Sept euribor 9937/9912ps at 4.5), and on the June’15 contract, a buyer of midcurve April 9925/9900/9875ps 5.0s, and 9925/9912/9900/9887p condor 3.0s. E0J 9925p went from no open interest to 151k. So…the theme appears to be that the market will test the Fed’s resolve on forward guidance by pressing on ever nearer contracts. EDZ14/EDM15 spread settled 33.0, now showing some love for the large recent buyer of 27-30.
–China factory output data was weak this morning. Also, news continues to swirl around the China trust or WMP fund that could default on 31-Jan. http://www.zerohedge.com/news/2014-01-22/chinas-first-default-coming-heres-what-expect
–Both gold and treasuries up this morning, trading in tandem recently. Possible fissures in emerging markets a catalyst for sporadic buying in both? New lows in both Turkish lira and in CAD.
–Today’s data includes Chgo Fed Nat’l Activity expected 0.9. Job Claims 330k, Existing Home Sales 4.92m and Leading Indicators +0.2
Jan 22. Green eurodollars (3rd year out) continue to lead curve to higher yields.
–Greens continue to be the weak link, with green pack closing down 2.125 while reds were up 3/8 bp and blues were down 1.25, The red/green/blue butterfly made a new high just over 5 bps and was more like 6 right after the floor close, and higher yet this morning. This fly has rallied over 40 bps in two months, as it was -37 in late November. Along the same theme, new recent lows in: 5/10 (-1.5 to 118), 5/30 (-3.0 to 209.8), red/gold (-0.375 to 279.5). In the last hour of trade yesterday there was a seller of about 3k green packs.
–There was some rolling of Green Feb and Green March 9850 puts into Green April 9825 and 9812 puts. Total open interest in green futures was up about 18k; I thought some of the moves in butterflies suggested liquidation, but that does not appear to be the case.
–There was also a buyer of 20k (new) EDZ4/M5 9950 call calendars (+ Dec, settled 5, Dec over), the same directional play as futures spread which had been bought in size of about 45k a week and a half ago for 27-30. Futures spread Z4/M5 settled 30 yesterday.
–Straddle spreads in green to blue midcuves continue to compress. The highest atm spread spread is June which is 4 bps. Green June 9825^ 52 and Blue June 9725^ 56. All are 2 to 4 bps, blues now only marginally higher despite their strike prices being 100 bps higher in yield than greens. On a related note, 5 yr vol has firmed relative to tens and bonds, as the latter remain close to monthly lows.
–ZeroHedge reports that bad loans in Italy were up 23% yoy to new record high, suggesting that Europe is not out of the woods as ECB stress tests loom.
Jan 20. Weekly interest rate option note
Net weekly changes in interest rate futures were marginal, with the ten year edging up and fives slightly lower. In Eurodollars, greens were lower by 2 bps, while blue and gold packs were 1 bp higher. S&P futures were also nearly unchanged on the week. Despite lack of net change from Friday to Friday settlement, there was still a significant amount of option activity, primarily in midcurve puts on EDH16 and EDM17 contracts.
Where changes did occur was Aussie dollar which fell 2.4% on the week to new lows, and EUR which was down about 1% to 135.40. The dollar index had its strongest close in a month; surprisingly, so did gold.
The ten year yield has been in a range of 2.50 to 3.0% for fully six months and closed the week nearly at the midpoint of 2.82. It’s hardly news that implied vol in treasuries remains anchored to the low of its range with TYH at 4.6 and TYJ at 4.8. Similarly VIX has a gravitational pull tethering it to the 12 handle.
On Friday, February treasury options expire. With futures having settled at 124-13.5, the 124/125 strangle closed at 9, 3 for call and 6 for the put.
Where we do note an interesting divergence on the week (small though it might be) is in the red/green/blue pack butterfly in Eurodollars, which closed Friday at +1.75 bps vs previous Friday at -2.125. What is the signal? It’s that the green pack is being pressured relative to the rest of the curve. Beneath the modest net change in the fly was an absolute avalanche of activity in green midcurves which I detail below.
By way of background, as the ten year yield steadily rose through the month of December from 280 to 300, the aforementioned butterfly actually had a larger magnitude move in bps, running from -35 to 0. (On 2-Dec, red/green was 80 vs green/blue at 112, now 102 vs 100). Since the weak January employment report, tens have essentially gone the round trip, right back to 282. The red/green/blue fly on the other hand, remains near its high.
The large trades on the week were mostly done on Thursday, for example, 2EH 9862/9837/9812 put fly bought about 30k and on Friday 2EJ 9825/9787/9750 put fly bought in size of 50k for 7 to 7.5. (2EJ expires April 11 on EDM16 contract, so it captures March FOMC). The net position in Green March is mostly long 9862 and 9850 puts, short 9837 and 9825 puts and long 9812 and 9800 puts as protection.
The 9850-9812p condor settled 2.0. 9862/9812p fly settled 5.5. Open interest levels are as follow with EDH6 9856 and EDM6 9827.5:
STRIKE SETTLE OPEN INT
2EH 9862p 17.25 137k
2EH 9850p 11.00 211k
2EH 9837p 7.25 226k
2EH 9825p 4.50 248k
2EH 9812p 2.75 180k
2EH 9800p 1.50 151k
2EJ 9825p 18.50 50k
2EJ 9787p 7.00 103k
2EJ 9750p 2.50 51k
If the ten year note should continue to press to a lower yield, (perhaps testing the lower bound of 250?), then green contracts should see a nice pop relative to the rest of the curve. Call for trade ideas.
Jan 20. Beware China’s New Year (of the horse). Possible domino contagion
–Fairly quiet session Friday, though new lows were eked out in red/gold pack spread to 280, 2/10 at 245 and 5/30 at just under 213. Red/green/blue pack fly +1.75 as greens continue to trade weak. All green blue atm straddle spreads (100 bp difference in strikes) are 4 bps or lower with blues over. Several weeks ago these spreads were more like 12-15.
–On Sunday morning I looked at ZeroHedge and unsurprisingly there were two posts warning of an imminent fall in stocks, from a technical (chart) perspective, one from Citi and one from United ICAP. DoubleLine’s Gundlach just released a presentation where he suggests stocks are similar to the 2011 precious metals run up, just prior to the fall. And this from Mauldin: “Not only does today’s Shiller P/E of 25.4x suggest a seriously overvalued market, but the rapid multiple expansion of the last few years, coupled with sluggish earnings growth, suggests that this market is also seriously overbought.” We’re probably on the verge of a quick 10% run up!
–More seriously, DB announced a surprise €1.5 loss and shares sank 4%. China’s growth slowed from 7.8 to 7.7%. But more importantly with regard to China is the potential default of a WMP (wealth mgmt product, China Credit Trust’s Credit Equals Gold #1) on Jan 31. WMP’s are shadow banking instruments that have become much more prevalent. As BAML says, “The potential first default, even if it’s not CEQ1 on 31 JANUARY, would be important based on the experience of what happened to the US and Europe; the market has tended to underestimate the initial event.” Like the MBS fund failures for Bear Stearns in the summer of 2007.
http://www.forbes.com/sites/gordonchang/2014/01/19/mega-default-in-china-scheduled-for-january-31/
http://www.zerohedge.com/news/2014-01-19/bank-america-actively-preparing-chinese-january-31-trust-default
Jan 17. Yesterday was a big day for put buying on short end
–Though interest rate futures were higher on the day there was a tremendous amount of put buying yesterday, especially on EDZ15, EDH16 and EDM16 contracts. The curve flattened, with peak one year spread Dec15/16 down 3 bps to a new low of 111. New recent lows as well in red/gold pack spread (280, -5.375), 2/10 (245.7, -2), 5/10 (120, -1.2) and 5/30 (213.2 -0.2). While treasury vol was a shade softer, red and green eurodollars were bid. For example, there was a buyer of red pack atm straddle strip from 242.5 to 243…not in big size but it had settled 239.5 the previous day and settled 242 yesterday. Ten year straddles were lower on the day…
–News today includes Housing Starts expected 0.985k, Industrial Production +0.3 and Consumer Sentiment 83.5. Jolts data as well.
–In 2EH (green march) puts alone open interest was up 227k contracts. While some observers might wring their hands and say that derivatives are out of control and another $250 BILLION in notional was added yesterday, the Green March put structures are fairly tightly capped.
–Below is a summary of some of the positions and OI changes:
2EH 9825/9875 combo covered 53.5, 4 puts vs 3 calls, 6.0 paid for 8k x 6k (prices 6 and 6)
2EH (grn march) 9862/9837/9812p fly 5.5 paid 30k
2EH 9850/9825/9812p fly 1x3x2 4.0 paid 20k
OI changes: 86p +25k, 85p +20k, 83p +58k, 82p +59k and 81p +65k
2EM (green June) 9775/9875 combo 3.0 paid for put (no futs) 30k, OI up 30k in both puts and calls
0EZ (red dec midcurve) 9862p 25-25.5 paid for 6k, OI +6k
0EM 9937/9912p vs 9950c cov 9927.5 bot put spread OI +10k all
2EH 9825p/3EH 9700p ppr pay 1.5 for green approx 15k
Seller of 100k 2 year note futures, OI +49k
Jan 16. Employment data rally sputters
–Interest rate futures fell yesterday, with green pack closing down 5.25. Red/green/blue pack butterfly once again closed positive with red/green at 104.25 (+1.25) vs green/blue at 103.25 (-1). Back month euro$ straddles firmed by 0.5 to 1.5 bps, which suggests the rally after employment was a short squeeze and the market remains bearish. EDZ4/EDM5 spread, which had been bought in size one week ago Wed from 27-30 is now back to 29.5, having closed as low as 24.5 in the interim. With just over one week to go in Feb ten year options, more trade is occurring in April and June, for example buyer of 5k TYJ 121 puts yesterday. Also a notable buyer of Feb 123 p which settled 4. 5/30 treasury spread closed at new recent low 213.4.
–There has also been more trade in April euro$ midcuvres as the expiration on 11-April captures the March FOMC meeting. April 9800p bought for 12.0 and settled there. The 9800/9775/9750 put fly settled 2.75. Open interest in those strikes +15k, +49k and +10k.
–This morning Aussie dollar at new low on weak employment report, and yen again approaching 105 (though Nikkei slightly lower this morning). FT reports that Japanese machine orders are at 5 year high.
–US news today includes CPI expected +0.3 with Core +0.1. Jobless Claims 327k and Philly Fed expected 8.7 from 7.0 last. Bernanke speech as well at 11:00 NY time on challenges facing central banks
Jan 15. Peak open interest in Dec’15 eurodollar indicates timing bets for onset of Fed tightening
–The squeeze higher in treausuries following Friday’s employment data was arrested yesterday by somewhat better than expected Retail Sales. Tens rose 4 bps in yield to nearly 287. Green eurodollar pack was once again weakest on the curve closing -8.375 bps. Stocks blithely reversed Monday’s losses and the VIX, which was sparked higher Monday, quietly slithered back to 12.3, near the low for all of last year.
–The dollar is stronger this morning with JPY 104.30 and CAD making new lows 109.65.
–Today’s news includes PPI expected +0.4 with Core +0.1. Empire State 3.0 from 1.0. Beige Book this afternoon in preparation for the FOMC in two weeks.
–Some modest bearish option positions taken yesterday. TYH 123/122.5/122 put fly bought 10k for 2. Green March 9850 puts were sold on exit and replaced with Green June 9775 puts (-10k/+15k). There was heavy trade yesterday in EDZ4/EDZ5 spread around 67/67.5. Settled 69.5, up 4.5 on the day. Interestingly, EDZ5 open interest rose by 12.6k, and has the most open interest of any eurodollar contract at 1.163 million, reflecting the idea that Fed tightening will commence around that period of time. In a related trade, there was a seller of Green/Blue March straddle spread, 9875^ to 9762^ for 4.5, selling blue over. I say it’s related because the greens continue to be viewed as the fulcrum period for tightening, and therefore the most volatile area of the curve.
Jan 14. Bearish rate bets pruned
–Bearish positions continued to be pared back in the wake of Friday’s employment data. For example, TYH 123 puts (the 3% strike) fell about 15k in open interest as 122/123 p spreads were sold. There was a seller of 20k Blue March 9750p and buyer of 70k 9700/9687p spreads, exit as well. Last Wednesday there was a buyer of 50k EDZ4/EDM5 spreads from 27 to 30, spread yesterday settled 24.5 though there’s no evidence of exit.
–Ten year yield slipped almost 4 bps to just over 2.82. Red/gold pack spread edged to a marginal new low of 284, with 2/10 at 247. Fixed Income was also supported by a pull back in stocks, with major indexes down a bit over 1%, Nasdaq and Transports closer to -1.5%.
–The five year note future (FVH) is now almost exactly halfway back from its high in late November at 121-03 to last Thursday’s low of 119-02.75. This ought to be an area of fairly stiff resistance, though data today could prolong the squeeze. NFIB small biz optimism expected 93.5. Retail Sales expected 0.0, +0.3 less autos and gas.
–The Fed is reportedly looking regulating banks’ commodity trading and ownership (FT and BBG). And this just in: Reuters reports that the FBI is reviewing the possibility that Fannie and Freddie were the victims of front running in the swaps market. This is the age of knowing how to make things happen…
http://www.reuters.com/article/2014/01/14/us-usa-swaps-probe-idUSBREA0D04N20140114
http://www.bloomberg.com/news/2014-01-13/fed-said-to-release-plan-to-limit-banks-commodities-activities.html
