April 30. Treasuries remain firm with flatter curve bias
Relatively big week with PMI data for US, Europe and China. ECB on Thursday. US employment data Friday. Greece and France elections this weekend. Elections will likely signal a further shift against austerity and a step toward bank nationalizations. The eurozone has made the following deal with banks: “We ask you to buy our sovereign debt (because the private market won’t) and we will finance through LTRO, because our revenues/tax collections can’t cover the increased interest expense along with other obligations of the state.” Seems like nationalization already. I don’t know the details but have seen some items about plans for a “bad bank” in Spain. The value of bad assets must be slashed and recognized.
–Today’s data includes Personal Income and Spending expected +0.3 and +0.4 with Core PCE +0.2.
–Last week US treasuries closed on a strong note, with tens at 1.93% and 2/10 at 167 (a new recent low). The low I have marked for this calendar year is 159 on Jan 31. A weak employment report will likely take that low out.
–Interesting note is that California’s April income taxes are coming in lower than expected. Warning sign for the country as a whole? http://www.sco.ca.gov/april_2012_personal_income_tax_tracker.html
–A bright spot for the US has been strength in equities, though I don’t think that’s enough to spark a self-sustaining recovery. Especially when I read stories like the following regarding IBM (italics mine): “The direct impetus for this column is IBM’s internal plan to grow earnings-per-share (EPS) to $20 by 2015. The primary method for accomplishing this feat, according to the plan, will be by reducing US employee head count by 78 percent in that time frame.
Reducing employees by more than three quarters in three years is a bold and difficult task. What will it leave behind? Who, under this plan, will still be a US IBM employee in 2015? Top management will remain, the sales organization will endure, as will employees working on US government contracts that require workers to be US citizens. Everyone else will be gone. Everyone. http://betanews.com/2012/04/27/the-downfall-of-ibm/
–I would like to think that manufacturing and energy production will have a place in rejuvenating the US economy. When all that’s left is sales and government, the question becomes “who is left to sell to?”
April 26. No drama in FOMC meeting
–There weren’t any surprises in yesterday’s FOMC. Curve edged steeper. Tens closed at 1.99%. Stocks were buoyed during the press conference when BB said the Fed could act if needed. The low in TYM occurred after the economic projections where several members moved forward the time of initial tightening, from 2015 and 2016 to 2014. In January, 5 saw tightening in 2015, this time 7 did. But interest rate futures bounced back and closed near highs.
–The Fed members aren’t great forecasters, and their estimates of growth, unemp and inflation reveal institutional bias. For example, the rate of GDP growth declined throughout 2011, but is forecast to go higher. The unemp rate fell, and THAT trend is expected to continue down the exact same path. But the inflation rate doubled from the beginning to end of 2011, and is projected to come down! Right. Growth higher, employment better, but inflation fades. In a world with more uncertainties than usual, in Europe, Iran, N Korea, and China (where the CEO of CAT confirmed a slowdown in construction), all forecasts are subject to change. My personal forecast is that more QE will be front and center by June, notwithstanding BB’s discussion about “stocks and flows” and the idea that the end of twist won’t have much impact. In fact he said (and I am paraphrasing) that the cessation of other QE’s didn’t have negative impact on rates. Really?? Then the easy follow-up question is why then, did you engage in more? And the answer is that RATES weren’t negatively impacted, EQUITIES were. THAT’S why we had to continue…
–News today includes Jobless Claims expected 375k from 386 (important because this data has recently popped back up close to 400k again). Also Chicago Fed Nat’l Activity which was -0.09 last.
April 16. All about Spain
–A bit of drama on the trading floor Friday as several large market making groups boycotted the euro$ option pit because of block trades that were deemed unfair due to lack of transparency. The story has been covered already, but deserves mention here only because it may have negative liquidity ramifications going forward.
–Spanish yields again rose Friday and CDS reached record levels, above 500 bps for 5 yr. By the end of the day, US equities closed at their lows, with SPX down about 1.25%. However the banks, which were leaders on the way up, were slammed: Citi, Wells, JPM all down around 3.5% while BofA lost 5.3%. GS -4.4% and MS -5.2%.
–In Spain, “cash business transactions over 2500 € are to be banned” in an effort to tighten tax collection. John Mauldin notes that many will try to get cash out of the country (as will occur with other peripherals). What does that do for gold coin demand? In another story about cash controls, China is LOOSENING the band on the yuan, which some say may also increase investment outflows from China. Safe haven flows to US?
–US curve flattened with tens sub 2% again. After last month’s surge to 2.40, the subsequent plunge in rates leaves bad positions which face more pain with increased eurozone stress. Euro$ calendar spread EDZ12/EDZ13, which was around 10 early in the year, then ran to 36.5 on the mid-March bond sell off, is now back to 14-14.5. I am beginning to think these spreads will invert (EDZ13/14 and EDU13/14). Financial strains will also ratchet up calls for more QE in the US, which may put pressure on funding rates if sterilized in nature (repos). I don’t know if the ideas are related, but there was a buyer of about 15k FFN 9975p for 0.5 Friday…selling pressure on FF’s due to massive bond repo? Even FFZ2 9975p are only about 1.5 bps. Might be well worth buying these as cheap insurance.
–There is some fairly good open interest in TYM 133 and 134 calls…around 95k in 134’s. Generally the idea has been that the market is capped on the upside, and that rallies will be grinding, associated with lower vol. I would strongly guard against that sentiment. The european crisis and other geopolitical wildcards could see treasuries revisit their low yields, i.e 1.80 in tens, very rapidly.
–In US news Retail Sales expected +0.3% and +0.6% ex-autos. Empire State expected 18.0.
April 11. Risk off everywhere….
–Ten year note yield fell below 2% to 1.99 in spite of supply this week, with 10’s auctioned today and 30’s tomorrow. 2/10 treasury spread made a new recent low of 170, down 3. (Has been as high as 200 this year). Everything about yesterday was “risk-off” as Italy and Spain yields rose with ten yr of 5.67 and 5.96 respectively, Spain up 100 bps in a month. SPX -1.7% in US.
–All of the liquidity driven rallies from the beginning of the year are showing signs of cracking. For example, the emerging mkt index EEM, which rose about 23% in the first month and a half of the year, has given about 40% of that move back. Copper has now broken the lower bound of its 2 month range, closing at 366, (has given away half the gain from 2012 rally). EUR/JPY which had tried to crack 106 early Monday only to rally back above 107, was 105.65 late. Even as Kocherlakota suggested rates might have to rise sooner rather than later, euro$ calendar spreads made new lows, with EDZ12/Z13 down 2 to only 14 bps (it had been up to 36 in mid-March). Even the gold turnaround rally yesterday is suggestive of flight to safety with the renewed flare-up of the eurozone crisis. German 2 yr Schatz yield hit only 9 bps. Euroswiss contracts rejected the quaint notion of positive rates, climbing back above par, with Sept 100.08.
–The most pain will ensue if treasuries continue to rally; there are still bad positions lingering from before the employment data… However, implied vol is still low and edged down yesterday…no sense of panic.
–Today’s news includes ten year auction and Fed’s Beige Book.
–From a Bloomberg article yesterday about the Illinois Teachers Retirement System:
The teachers’ fund is one of the country’s worst-financed
statewide pension systems, reporting that it is only 47 percent
funded. And that’s if you buy the system’s rosy accounting
assumptions, including that it will achieve 8.5 percent annual
returns on its assets. This level is tied for the most
aggressive investment assumption among state pension funds in
the country, and the fund has had to get creative in an effort
to meet it. Pensions & Investments magazine says it has the
fourth-riskiest pension investment portfolio in the U.S., with
less than 17 percent of its investments in fixed income and
cash.
April 5. Lack of QE resolves with lower treasury rates(!) as risk assets fall
April 5. The market continues to attempt to sort out the implications of a Fed less inclined to engage in QE going forward. For the time being the result appears to be a downward adjustment in risk assets, or those assets most boosted by liquidity measures (gold -$50, silver, stocks). And, after an initial hiccup by the long end after Tuesday’s FOMC minutes, a move into the safety of treasuries. Perhaps one small indication of risk aversion is the topping formation in EUR/JPY which has a triple top in late March at 111 and now trades 107.50. (A bounce in yen and a fall in euro relative to $). While there is concern in Germany about inflation, Spain continues to warn about “extreme pressure”. The curve flattened, another “off-risk” signal with 2/10 falling 4 to 189, and red/gold down over 8 bps to 187.5. Interest rate option trade continues to favor steepening strategies and reflects concern about higher treasury rates. But red/gold pack spread can’t seem to break through 200. Perhaps the market doesn’t want to admit it, but the lingering cloud is an addiction to central bank liquidity. The fear is that without Fed buying, yields must go up. I have some sympathy with that view, but what really has tended to happen is that stocks decline and banking (bad asset) pressures build without the drip of CB liquidity. So treasuries rally. If we are truly perceived to be in a ‘self-sustaining’ recovery, then a move to higher rates is likely. It’s not clear yet, and small signals suggest the market has doubts.
April 2. Bonds turn down
–The long end of the US bond market turned ugly awfully quickly Friday afternoon, for no other reason than the apparent completion of end of the month/quarter buying. Take the visual of the wile e coyote running off the side of a cliff and looking directly into the camera as he realizes the acme rocket tied to his back has suddenly run out of fuel.
–Citi was a seller of some 20k TYK 131c at 14-15 (looks new) as tens edged higher. I was a bit surprised that futures continued to grind higher in the face of the equivalent of 5k futures sales (calls ultimately settled 10). And just prior to the sell off, one player (we’ll call him wily), sold about 5k US5H (expired friday) 139 p at 2-3 when futures were 139-02. Within an hour the contract traded down to 137-15. Ten year yield was as low as 2.14% in the middle of the day before ending at 2.22%. The bond was up at least 10 bps off the low yield of the day, finishing at 3.35%. The near part of the curve was pretty much unchanged. Eurodollar straddles all settled unch’d, though treasury vol firmed. It feels as though the upper end of the yield range will be tested going into employment. Curve was steeper with 2/10 up 5 bps to 188. Red/gold up 8.25 to 188 as well.
–Today’s news includes ISM expected 53. Interesting to note official Chinese PMI was 53.1 (maybe they were just leaking the US data), while the HSBC estimate for China PMI was only 48.3. I would lean toward the latter estimate, as Korea’s exports which had been expected +1.3% were actually -1.4.
–Eurozone PMI miserable at 47.7.
March 29. Interest rates on hold
–Not much change in interest rate futures yesterday. Straddles were crushed…USM 138 straddle from 458 to 442 as futures settled unchanged. TYM 129.5^ from 230 to 221, I marked at 5.7 vol. TYK from 136 to 127. Big calendar spread buyer in eurodollar EDU13/EDU14 yesterday in size of about 15-20k from 45.5 to 47.0. Settled 46.5, up 1 on the day.
–Today’s news includes Jobless Claims expected 350k.. Final Q4 GDP expected +3.0. 7 yr treasury auction.
–According to Business Insider a report from Goldman suggests that unseasonably warm weather had added payrolls that now may be reversed. Next Friday NFP expected 213k. If the employment report is weak, the prospect of QE3 will loom much larger at the April 24/25 FOMC.
–Some talk of large asset reallocation from stocks into bonds as the quarter ends. Note that Brazil, Russia, India, China etfs all closing right at monthly lows. The last month and a half appears to have been consolidation of outsized gains from the beginning of the year, but there are some indications that emerging markets are rolling over. Copper is similar, having started the year 330 to 340, rallied to 400, and now has been between 370 and 395 for the past 2 months.
March 26. Steepening bets in eurodollars continue
–Interest rate futures continued to rebound Friday as tens fell another 3 bps to 2.24%. Stocks were weak early but came back to close higher. There was a ‘glitch’ associated with the Bats exchange where a sale of 100 shares of AAPL transacted just above $542, when the stock had been around 598. At a price of $542, $50 billion would have vanished from the market cap. The trade was cancelled at that price, and the low was adjusted to 594.40. Markets are much different now, but in the old days of the CME trading floor, whenever a market hit an “air pocket” of no bids or offers, that high or low was nearly always revisited within a couple of weeks. In a case like this where the price gapped lower, the action said to me that longs were already in and therefore didn’t have resting bids below the market, and shorts were in strong hands that weren’t anxious to cover on the first minor dip. Bats story: http://www.businessweek.com/articles/2012-03-23/bats-all-folks-the-epic-fail-of-the-worst-ipo-ever Even in the electronic era, the “flash crash” low of May 6 2010 was taken out (after a large bounce higher), by the end of that month.
–There was another large euro$ option trade expressing a view which has already been entered several different ways recently in size: Sold 0EM 9937p/ bought 3EM 9837/9812ps paying 3.0/3.5 for 50k. Synthetic steepener. There are 1 million open positions just in blue June puts compared to less the 700k in all four futures contracts comprising the blue pack. This at a time when several Fed officials, notably Bullard, are expressing concern about inflation. (see further notes below)
–On the other hand, Italy’s Monti warned about Spain’s finances, which could cause a contagion flare-up and send money into safe havens (USD).
–From ZeroHedge: “Sturm, Ruger (the 4th largest gun-maker in the US) who after receiving orders for over one million units in Q1 has temporarily suspended the acceptance of new orders.” So there are SOME bright spots in the economy…
–Treasury auctions 2’s, 5’s and 7’s this week.
NOTES / LARGE BLUE EURODOLLAR OPTIONS: There are over 1 million open positions in blue June puts. In blue June calls 726k open. In the blue pack futures (EDM15, U15, Z15 H16) there are only 696k open.
–On Friday a new position was entered selling 50k 0EM 9937p and buying 50k 9837/9812ps for 3.0 to 3.5. These options expire 15-June, 2012, in 82 days. Blues have been in focus, 3 years forward, as that’s the part of the curve just beyond the Fed’s vow to keep rates low. There are other scenarios that could also cause near term steepening, for example a loss in sponsorship for the long end of the treasury curve either by the Fed itself, or by other domestic and foreign participants, concerned about a combination of inflation and budget worries. A quote in Business Insider by David Kotok sums it up: “We do not know how this process will end. We have never been in a place where the major central banks of the world have tripled the sizes of their balance sheets and have driven the short-term interest rate near zero. We are in uncharted waters. We do not know where the rocks and shoals lie.”
Read more: http://www.businessinsider.com/kotok-uncharted-waters-2012-3#ixzz1q22mK48Q
Another quote from ZeroHedge underlines a possible inflation catalyst: “US non-financial corporates hoarding of a $630bn mountain of money in 2.5 years (or 85% of retained earnings) have retarded the most incendiary effects of the Fed’s extraordinary actions. The key issues will be whether these same corporates will begin to spend this cash…”
In any event, what the large trade mentioned above did was to crush vol in the red midcurves, sending 0EM 9937^ down from 17 to 15 and 0EU 9925^ from 27.5 to 26. The roll from EDH13 (99.41) to EDM14 (99.345) is 6.5. So all other things being equal, EDM3 will roll up 6.5 bps in the next 82 days and the 0EM puts will be worthless. But EDH15 (98.395) to EDM15 (98.20) has a roll of 19.5, so even the blue put spread would go out worthless. This trade and all the others like it are dependent on curve steepening. At recent lows EDM13 traded 9924.5 while EDM15 traded 9798. If we expired at those levels the back put spread would fill out to 25, against a loss of 13 on the 0EM puts, a net gain of 12, less 3.5 paid. The risk, which seems rather small, is that something occurs to cause a bear market flattener, where EDM13 leads a sell off. The other consideration to bear in mind is whether the size of these option positions can create unexpected futures moves.
March 20. Treasury rates surge with tens to 2.38%
March 20. Rates surged yesterday with ten year hitting new high close of 2.38% up 8 bps. 2/10 went to 200. New red/gold pack spread 203, up nearly 13 bps! Eurodollar option trading featured huge buying of green and blue put structures (more below), almost all new. Back spreads rose the most…for example EDZ12/13 was up 3 to 36.5, while the next year spread, EDZ13/14 was up 5.5 to 61.
–AAPL closed at a new high above 600 as it unveiled its dividend news, but the broader market slipped from its highs going into the end of the session. This morning Hong Kong and China are down over 1%. There is a report from BHP that sees Chinese iron demand slowing. News from China increasingly confirms a slowdown.
–A couple of news items mention that Saudi Arabia will ride to the rescue of high oil prices, though I think the damage is done just due to volatility.
–Bernanke gives a speech at a university at 12:45 according to Bloomberg. Probably doesn’t have much in the way of policy implications that isn’t already known.
Summary of some put buying:
0EM 9925/9900ps sold at 3.5 vs +3EM 9800/9775ps 7.0, 15k midcurves …EDM3 is 9932 so 7 otm vs EDM5 9815, so 15 otm
pkg…+8k 2EM 9875/9850ps 6.0, +8k 3EM 9800/9775ps 6.5, sell 16k 0EM 9925/9900ps 3.5
————–
Below are not steepeners…just shorts further out curve:
3EM (blu jun) 9775/9750ps 3.5 paid for 10k covered 9820
2EM (grn june) 9862p bot vs 9912/9925c spd 5.5 to 6 to 6.5 for 15k
On this last one I believe it is a guy covering residual position of same position the other way in April expiration.
March 16. Implied vol drop in treasuries suggests yield rise might have run its course
New highs in curve yesterday as two year note yield fell slightly while tens were up 1 bp to 2.28…2/10 to 191. The move to higher rates appeared to run out of steam as implied vol leaked out of straddle prices. For example, TYM 129 straddle settled 5’41 Wed and was down to 5’30 yesterday. I would have thought that the palpable risk of higher yields would keep a strong bid in puts, but that fear isn’t being reflected. Midcurve March options expire today… after the close of the pit 0EH 9937 straddle traded 3.0, 2EH 9900 straddle 5.5 and 3EH 9837^ 8.0. A telling trade for me was the covering of a green april position, buying 2EJ 9887p vs selling 9912/9925 call spread. There was 50k of this position outstanding (short puts). First thing in the morning, 10k were bought for 9.5 and another 10k for 9.0. I was surprised the pit would allow a better price on the second batch, and perhaps the buyer was as well, because he stopped. The point is that the market easily absorbed additional selling pressure; seems to be good support at these yield levels.
–Goldman’s Hatzius expressed confidence that sterilized bond buying is on its way from the Fed, also supportive of financial asset prices.
–Today’s news includes CPI expected +0.5 with Core +0.2. Industrial Production expected +0.5, and Consumer Sentiment expected 76.
–From the Christian Science Monitor: “Three in ten young adults live with parents, highest level since the 1950s. A weak economy and high debt levels are prompting more young adults to return to the family nest, a new survey shows.” Once again Seinfeld was ahead of the curve with George Costanza’s pick-up line. “Hi. My name is George. I’m unemployed and I live with my parents.” http://www.youtube.com/watch?v=cKUvKE3bQlY
