May 28. Bonds trade heavy
–First, a bit of Chicago news, where the Blackhawks scored 3 goals in the third to force game 7 on Wednesday.
http://sports.yahoo.com/blogs/nhl-puck-daddy/blackhawks-force-game-7-michael-frolik-nasty-penalty-025518418.html
–Sell in May and go away? Certainly that’s been the case for the Dow Jones Utility avg which has lost 7.2% this month. The start of May saw it at a five year high of 538 (all time high of around 550 in 2008), and now it’s just below 500. Does it make a difference that this yield proxy part of the stock market is cratering? Broader equity indices are rallying, with SP chewing into last Wednesday’s reversal range.
–There is continued pressure in US interest rate products, with tens up to 203 as USD/JPY rebounded above 102 and JGB yields turned back up (now around 87). 2, 5 and 7 year auctions this week.
–New highs in some of the eurodollar calendar spreads, with EDZ13/EDZ14 up 0.5 to 18 and EDZ14/EDZ15 also up 0.5 to 46. Whether due to uncertainty about the Fed’s exit strategy, or global capital flows driven by Japan, or just a domestic adjustment of rates that have been extremely low, US bonds trade bearishly.
–News today includes Consumer Confidence expected 71.5, and Dallas Fed expected -8 from -15.6.
May 24. Treasury option expiration. Happy Memorial Day weekend
–Not much net change in interest rates yesterday. June treasury options expire today with ten years likely pegging the 131.5 strike, around the 2% yield. Option open interest doesn’t lend much of a clue, with 132 thru 130.5 puts all having open positions of 45-50k. Early close for the holiday…auto exercise determined by noon CST settlement price.
–Implied vol is firming. For example, a couple of weeks ago the red midcurve Dec 9950 straddle was 16/16.5, yesterday there was a late buyer of 500 for 18.5, settled 19.0. Also, red and green futures are seeing a bit more selling pressure relative to the back end of the curve in the past 24 hours. Yesterday red pack -0.5 and green -0.75, but blues were unchanged. In fact, since last Friday, EDM14/EDM15 spread has moved from 26 to 30.5, up 4.5 bps, while EDM15/EDM16 has gone from 55 to 60, up 5. Perhaps green midcurve puts are a bit cheap relative to blues?
–US economic news today, Durables expected +1.1 from -5.7 last.
–Japan continues to be volatile, though Nikkei was able to rally from the lows and turn positive. If the foundation of Abenomics proves unstable in the next few months, then the global central bank embrace of QE could come under fire.
–There continues to be selling (at higher levels) of TYU 129/133 strangle. Most of the juice is in 129p, 47s vs 133c 16s. So strangle settled 63; I saw some sales at 61, there was a good size seller earlier in the week at 57. Also a buyer yesterday of 10k FVU 116.5p for 0.5 to 1. I calculate that strike to be about 120 bps away.
May 23. Bernanke hints at pullback; Japan unhinged.
–Extraordinary volume associated with yesterday’s sell off in US treasuries. Tens trade 3.1 million and euro$ 4.4. While Bernanke warned that less accommodation would “carry a substantial risk of slowing or ending the economic recovery”, he also said the Fed could start reducing bond buying “in the next few meetings”. The mere hint of a pullback by the market’s biggest sponsor sent bonds into a tailspin, with tens up 8 bps to 202.5. Curve steepened with 2/10 up 7.5 to new high over 178. All euro$ calendars made new highs It was March 19 of last year when red/gold hit 203 and 2/10 got to 200 (now 186 and 178). But that’s when it appeared the economy was taking off; this has a different feel, more about panicky yield-reach reassessment, which had been predicated largely on central bank policies. Looks like it can get quite a bit more volatile. Treasury implieds at upper end of recent range with TYU at 4.5, but likely to push higher.
–Japan’s 10-year yield increased nine basis points to 0.975 percent as of 9:28 a.m. in Tokyo, according to Japan Bond Trading Co. But now all the way back to 83 as the Nikkei plunged 7.3% pulling global stocks lower in its wake. Perhaps unsurprisingly it’s Japan that is the first one to spin out of control. JPY -1.6% now to 101.50. No help from China as HSBC PMI flash fell below 50 to 49.6.
–Today’s US news includes Jobless Claims 345k, New Home Sales 425k and PMI flash expected 50.8.
–Red/green pack spread up 4.5 bps but green/blue +5.625 and blue/gold up only 2. Market still appears to judge 2015 as the pivotal time for policy change, but these perceptions can get quite a bit looser going forward.
May 22. Bernanke testimony before JEC
–The Bernank appears before Congress today and FOMC releases minutes of its last meeting.
–The BoJ “affirmed a plan to double the monetary base, pledging to adjust policy as needed after a jump in bond yields threatened to undermine stimulus… BOJ Governor Haruhiko Kuroda told reporters in Tokyo that the central bank will conduct its debt purchases in a flexible manner, and that the recent volatility in government securities isn’t yet affecting the economy” from BBG. JGB yield still around 88 bps.
–Yesterday morning yields were slightly higher in the US, but slipped back after Bullard endorsed QE as a policy choice. While economic data in the US is mixed to soft, equities are on a tear and housing is buoyant. The catalyst for a shift to higher US rates is the (Fed’s) realization that QE policies can sow the seeds of future risks. I think several officials have taken that position, even Yellen recently mentioned risks. In Japan these risks have become apparent as JGB yield doubled from the low and some companies have pulled bond offerings. This is probably a good opportunity for Bernanke to signal a move to greater flexibility (specifically QE reduction). He can set the stage for incremental changes at the June meeting, which includes a press conference, and gradually pave the way for a new Fed chief to take over next year with a somewhat more normalized policy. Recall he will not be at Jackson Hole in August, and the FOMC in July does not have a press conference. The next FOMC with press is Sept 18.
–An interesting political comment out of Citadel’s chief, Ken Griffin, in the Chicago Tribune: “Griffin said he recently spoke with a top Illinois official who told him school reform was politically “really tough.”
“Every alderman in our city is a Democrat. Our mayor is a Democrat. Our governor is a Democrat. Our (state) house is a super-majority of Democrats. Our (state) senate is a majority of Democrats. And the President of the United States is a Democrat. What is so politically hard when you control the entire political process from front to back?” Griffin asked. “What is politically hard is that the Democratic Party is captive to the unions. They’re not captive to the children.”
May 21. JGB yield rise along with hints of QE reduction could cause bond sell off
–US interest rate futures closed slightly lower yesterday with ten yr note tacking on just over 1 bp to yield 196.3. There were some large trades in September ten year options, new put spread buyers and a new seller of 20k 129/133 strangles 58 to 57. The 129 strike is about 22-23 bps away, which would equate to around 2.19 in current ten year yield (with another 10 bps of premium cushion).
–The big action yesterday was the early precious metals plunge, followed by a powerful rally. Silver made new lows for the move, taking out the mid-April low on Sunday evening, but closed slightly higher on a range of $3. However, open interest was only up by 2900 contracts. Gold held last month’s lows and closed higher on the day, huge volume of 276k with open interest +7900.
–Not much in the way of economic news today, though both Bullard and Dudley speak, at 11:30 and 1:00 NY time respectively. The big event is Bernanke’s testimony tomorrow in front of the JEC. Bonds are trading heavy; additional hints about QE reduction should force the hand of weak longs.
–Yen is lower today after yesterday’s bounce, USD/JPY 102.70. JGB yield continues to press higher, now up 5 bps to 89. It appears as if there are growing doubts that Japan can keep a firm hand on the financial forces it has unleashed, like Icarus flying too close to the sun. If JGB yields continue to surge, there will be global bond market reverberations.
May 20. Bernanke in front of JEC Wednesday, hint of QE reduction?
–BBG “Japanese Economy Minister Akira Amari said further losses in the currency would threaten to negatively affect people and the government’s job is to minimize that.” The yen has bounced, but the Nikkei is up 1.5% (nominally above DJIA) and JGB yield is up a few bps to 84. Silver plunged at the open last night to take out mid-April lows, though gold is holding above April’s low so far. US interest rate futures marginally lower in spite of precious metals and other factors that are somewhat supportive, for example N Korea missile tests.
–The big news of the week will be Bernanke’s appearance before the Joint Econ Committee Wednesday. FOMC minutes also released later that day. Reuters adds to the QE chorus: “Job market gains could lead Fed to taper QE3 early”, mostly citing SF Fed’s Williams comments from last Thursday. If Bernanke echoes those sentiments Wed, the one percent handle in tens will become a distant memory.
–“This year, big U.S. companies have given the go-ahead for $286 billion of buybacks, up 88 percent from the same period last year, according to Birinyi Associates,” If QE is dialed down, could buybacks lessen the impact with respect to stocks?
–Chicago Fed National Activity Index for April released today, last at -0.23 and three month moving average edged into negative territory.
–Reuters opinion piece says that the dramatic improvement in the deficit makes political cooperation on difficult structural problems even more unlikely. However, plans are still floated. For example, (HuffPost), “The plan sponsored by Sen. Kirsten Gillibrand (D-N.Y.) would force the U.S. Secretary of Education to automatically refinance most government [student] loans carrying interest rates above 4 percent into fixed, 4-percent loans. Roughly nine of 10 federally-backed loans would be affected, saving nearly 37 million borrowers billions of dollars in annual interest payments.” We’ll see if this idea has legs by watching whether Sallie Mae (SLM) pulls back from multi-year high set Friday…
May 17. Move to higher yields reverses abruptly
–Yesterday’s economic news was decidedly soft with Jobless Claims up, Philly Fed -5.2 and CPI -0.4 with Core only +0.1. However, it took comments late in the day from SF Fed’s Williams to cause a downturn in stocks, saying that the Fed may reduce bond buying by this summer.
–This morning the dollar is stronger, Aussie at new low. Precious metals slightly lower, but stocks are again edging higher!
–Interest rate futures reversed much of the bearishness of the past 2 weeks. Curve flattened aggressively, implied vol was sucked out. TYM traded nearly to 50% retrace of May’s sell off, 5’s got to around 38% retrace. Bill Gross says bond bull market probably ended with the end of April: http://www.bloomberg.com/news/2013-05-16/gross-says-bond-bull-market-probably-ended-april-29.html
–Today’s news includes Consumer Sentiment expected 76.4 and Leading Indicators expected +0.3. Bernanke speaks Saturday: The title of his speech is “Economic Prospects for the Long Run”. And he appears Wednesday in front of the Joint Econ Committee; FOMC minutes also released Wed.
–Reuters has an item about the ECB using upcoming regulatory powers to discipline or close problem banks. “Central banks provide liquidity against collateral. But what do you do for addicted banks?” said one person familiar with ECB thinking. “If a bank returns continuously to get liquidity, (the ECB) will make it more difficult. You will have to pay a higher price. You will have to change the rules for provision of liquidity.” http://www.reuters.com/article/2013/05/17/us-ecb-banks-support-idUSBRE94G05020130517
There is an additional story about a troubled Austrian bank where losses will be taken either by taxpayers or by a bad bank, funded in part by capital provided by healthier lenders, (who are balking at the plan). http://www.reuters.com/article/2013/05/15/austria-eu-hypo-idUSL6N0DW28Y20130515
–Are depositor bail-ins about to return to the headlines?
–And finally, here’s a story about a future soybean options trader: http://ca.news.yahoo.com/blogs/good-news/autistic-teen-may-smarter-einstein-163701084.html
May 13. US rates jump Friday, Japan yields surging
–US rates jumped Friday on big volume, with tens up 9 bps to 1.90. Curve made new highs. 2/10 rose a bit over 7 bps to 166 and red/gold euro$ pack spread was up a stunning 12.5 bps to 171. The rumored Hilsenrath tapering article came out late Friday: Fed Maps Exit From Stimulus. Now we can interpret what the Fed meant by saying it might increase or reduce QE, a heavy tilt toward the latter. What’s somewhat surprising about Friday’s sell off is change in open interest. While huge volume would suggest new entrants on the short side, tens registered an increase of only 1300 contracts, while five yr open interest actually fell 40k and bonds were down 17k. More suggestive of long liquidation rather than a change of trend? However, euro$’s were up 46k, mostly in greens, and implied vol rose smartly, indicating fear to the downside. Given that even junk bonds recently fell below 5% yield, it’s safe to say that everyone who wanted/needed to chase those few extra basis points got them, and are now looking around to see that no one else is behind them. Just like Will Ferrell streaking in Old School.
–The G7’s green light for Japanese devaluation saw JGB yields leap higher, now at 78 bps (up 9). A pullback in US stimulus while the ECB is following Japan’s lead is a positive for the dollar and probably not so supportive of US stocks.
–Retail Sales today expected -0.3 from -0.4 last. Less autos and gas expected +0.4.
May 10. All about yen
–$/yen burst through 100 yesterday and quickly surged to a new high at 100.60, and is now 101.20 as G7 meets. Japanese ten year jumped 11 bps to 70, a huge percentage yield increase. As Japanese investors move abroad for bond investments, funding the gov’t will become a problem for Japan. US rates also moved higher yesterday amid broad based dollar strength, with curve steepening to new recent highs, though just barely. This morning TYM is testing support at 38% retrace level of March low to the high in the beginning of May, 132-12.
–Interesting to note that the proxy for yield in the stock market, the Dow Utilities Index, also put in a top right in the beginning of this month, and has fallen nearly 5% since then (in only 7 trading days). As mentioned previously, the Utilities responded even more strongly than the SPX on the run-up from mid-November associated with yen weakness, with DJUI +23% and SPX +18%. Now we are seeing a divergence; with a new low in yen, Utilities are falling while SPX squeaks out new highs.
–While there were violent moves in FX, implied vol in rates was once again lower. The longest dated euro$ straddle EDH16 with 34 months left until expiry, was trading 89 a few weeks ago, now down to 82.5 (the 9900 strike).
–There was a rumor yesterday that Hilsenrath of WSJ was writing a piece about QE tapering sooner rather than later. That same paper notes the decline in the deficit in today’s issue. With reduced borrowing needs, QE will take a larger percentage of treasury issuance…perhaps a reduction in QE is getting closer…
–Today Bernanke speaks at 9:30.
–Another 180k of the red midcurve/green midcurve put spread was added yesterday. I have heard various stories about this position being a hedge against another position. Not sure about that, but it does remind me of an old euro$ pit story. Wayne Friedman (FO) had bought a bunch of low delta calls from a local (was it Pat Sullivan?) and wanted to bust the trade a couple of minutes afterward, perhaps due to a desk error. The market maker said he couldn’t, he had already bought something against them (as a hedge). Wayne says “What?” Market maker, “A new jaguar”
May 8. Skeptical undertone in the markets
–The Fed’s QE in support of asset prices is supposed to lead to increased confidence and “escape velocity” in the economy, or at least that’s what is hoped. However, skepticism, rather than confidence, seems more prevalent. “Much of the market’s gains in the past few years have been due to the Federal Reserve making money cheap and keeping interest rates low, forcing investors into riskier assets like stocks.” This line is from a HuffPost article; it has become common knowledge. But there’s an implied addendum: ‘what happens if the Fed stops?’. I saw sev’l headlines this morning saying China’s Trade Growth Accelerates, yet every article including WSJ, RTRS and BBG said that analysts doubt the veracity of the data. US Consumer Credit was released yesterday, weaker than expected at $8B, but the trend continues: almost all growth in consumer credit is non-revolving, which is to say student loans and autos. It’s simply not a picture of broad based confidence, even with Dow 15000.
–From a BBG article: “Fear is big business nowadays,” Hussein said. “People buy the guns because they’re afraid. People buy the guns because they want to scare others. We’re in a jungle now.” You might think that the story is about the US, where gun sales have soared, but no, this article is about collapsing investment in Egypt. http://www.bloomberg.com/news/2013-05-07/egypt-investment-collapses-as-violence-sparks-lawless-vigilantes.html
–Today’s US news includes comments by Jeremy Stein who has recently cautioned about credit overheating, and the ten year auction.
–Big trade in euro$ options yesterday, steepener of red/green March. Sold 100k 0EH 9925/9900ps 2.5s (12d) and bought 2EH 9875/9825ps 7.5s (18d), all at a price of 5.0. Red/Grn March futures spread unchanged at 43.5, though there was some liquidation of other year spreads, including sales of Grn/Blu June at 50.0
