Service ISM at new high

April 6, 2021

–SPX and DJIA at new record highs yesterday, not Nasdaq or R2K.  Yields eased from Friday, though Service ISM at 63.7 made a new high, at least since 1998 which is as far as BBG data went back.  Ten year yield was down around 0.5 bp to 1.716%.  Volume in rate futures was subdued.  Implied volatility bled, with TYM now 4.7 from over 5 at the end of the week.  Though WTI dropped $3/bbl yesterday, it held the low of the range in March so far and has rebounded to 60.30, up 165 this morning.

–In euro$s, the peak one-year calendar spread EDM23/EDM24 set a new high at 78 bps.  EDZ21/EDZ22 settled just above 1/4% at 26 bps, down 2 on the day.  The strongest part of the eurodollar curve was the green pack (3rd year), which closed +4 at an avg 98.87, while golds (5th year) only barely settled positive at +1 at an average 97.735.  Interestingly, 4EU 9637.5 puts have seen consistent buying at 1.5, with a buy of 4k yesterday and open interest now over 12k.  Underlying EDU25 settled 9778.5.  

Posted on April 6, 2021 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Can’t depend on YCC

April 4, 2021 -Weekly Comment

Net changes on the week in eurodollars: Whites -2.125, Reds -10.625, Greens -19.375, Blues -20.75 and Golds -15.75.  The five year was the leader on the treasury curve, up 12 bps to 97.4 (a new high), with tens up 6.2 and thirties essentially unchanged.  5/30 treasury spread is 139, the lowest level since late January, at significant support of 137 to 139. 

Reds are the second year out, greens and blues are the third and fourth years.  Obviously the surge in yields in years 3 and 4 relative to the front end of the curve is telling us that the Fed will certainly be tapering/tightening in two years.  Even a three-month spread like EDM2/EDU2 settled at 9.5 on Friday, a new high, having been between 1.0 and 2.5 from last September through January.  That spread reflects a hike probability of over 35% during that three month period, which is only 1 ¼ years away.  EDU1/EDU2 settled at a new high of 22.0 which signals near certainty of one hike over that year.

Last week Mfg ISM surged to 64.7, the highest level since 1983.  Unemployment fell to 6.0% with non-farm payrolls jumping by 916k.  This week ISM Services is released on Monday, expected 59.0.  The high in 2018, the year in which almost all economic data made new highs in the Trump era, was 60.9. On Friday PPI is released, with Core yoy expected 2.7% vs 2.5% last month.  The high in 2018 was 2.9%.  Powell has repeatedly vowed to keep rates low because of continued economic slack, especially in the service sector, and because inflation cannot be sustained due to generational headwinds.  We get info on both fronts this week.

It’s worth noting that in 2007, just following the height of economic activity before the GFC, the unemployment rate bottomed at 4.5%.  In 2004 as the Fed began to hike it averaged around 5.5%.  In 2006 it averaged 4.6%.   To think that the Fed must wait for something like 4% unemployment before raising the FF target from the emergency level of 0.0 – 0.25% is utter folly.  In only three out of the past twenty years has unemployment been at 4% or lower. 

In terms of the sustainability of actual price increases (that the Fed promises to look through) I tend to think about the example of Jon Corzine blowing up MF Global by loading up on peripheral debt.  There are those who say, “Ultimately he was right, sovereign debt of Portugal and Italy, et al. had a tremendous rally.”  No.  He was wrong.  He destroyed the company, dipping into customer funds in the process.  He probably should have gone to jail.  Don’t be Jon Corzine. 

Sure, it might be the case that there is a one-time upward adjustment in prices followed by stability.  However, the market is not currently giving any indication of that.  TIP breakevens are at new highs with the ten year above 237 bps, a level not seen since 2013.  Back month euro$ contracts easily set new lows on Friday.  There will come a time when the market signals that the rise in yields has run its course.  In my opinion, we’re not there.  Too many trapped longs hoping the Fed will come to the rescue with YCC.  In that regard, look at ten-yr JGBs.  For the last two quarters of 2020 the yield ranged between 0 and 5.  In February it rallied to 15.5, then came back down to 6.8 in late March. Now it’s back to 12.   

FOMC minutes are released on Wednesday.  On Thursday Powell participates in an IMF Forum on the Global Economy, starts at 12:00.  There will be more assurances that inflation is temporary, that growth is Covid dependent, that there is a lot of slack in the labor market.  Powell will tell us that the current emergency policy is appropriate.  By the way, the NY Fed’s Q2 Nowcast is 6.2%.

With regard to the front end of the market, I remember a time when banking issues caused front Eurodollars to sell off due to credit concerns.  However, April and June Eurodollar contracts settled at 9981.5 and 9982 respectively, both lower in yield than the current libor setting of 19.975 (Thursday).  I don’t know enough about banking activities (and apparently neither do a lot of the banks themselves) but there were a couple of downgrades relating to the Archegos episode.  I don’t want to single out any one bank in particular, BUT, Credit Suisse, right on its own website has a tidy summary:

Moody’s, S&P and Fitch are all have negative credit outlooks, with Moody’s giving this summary:

The negative outlooks on the senior unsecured debt, long-term issuer and deposit ratings – where applicable – of CS and CSG reflect Moody’s view on (1) emerging signs of a higher-than-anticipated risk appetite or potential deficiencies in its risk management, audit, compliance or governance control processes and frameworks, as highlighted by a likely material loss from unwinding concentrated leveraged equity and derivatives’ exposures following the failure of a US hedge fund client, in addition to the aggregate risk the group assumed in relation to Greensill’s founder and his companies culminating in the wind-down of CS’s supply chain finance funds…

We all have unquestioning faith in our Central Banks to backstop all of the messy problems in the world of finance, oh, and climate change… and of course equality, but I have to wonder how anyone can sell EDM1 9981.25 puts at 1.25 or 1.5 bps.  It’s not that they will definitely finish in the money, although at Thursday’s libor setting they would be darn close to breakeven.  It’s that there is supposedly a credit aspect in the contract, and recent escapades highlight the fact that not all lending is ‘money good’.  EDZ1 is a bit more reflective of these concerns for year-end, having settled at 9972.0 Friday, down 2.5 on the week.  I had been surprised that the 9975 straddle was recently sold down to 8.0; it settled 9 on Friday.  I had suggested looking at EDZ1 9975/9962p spread for 2.5, still a reasonable buy for 3.0 having settled 3.25.   

UST 2Y13.918.44.5
UST 5Y85.497.412.0
UST 10Y165.8172.06.2
UST 30Y236.6236.3-0.3
GERM 2Y-71.5-70.80.7
GERM 10Y-34.6-32.81.8
JPN 30Y66.269.33.1
CHINA 10Y319.8319.90.1
EURO$ M1/M28.514.56.0
EURO$ M2/M342.552.510.0
EURO$ M3/M472.577.04.5
CRUDE (active)60.9761.480.51
Posted on April 4, 2021 at 12:15 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options


April 2, 2021

–NFP today expected 660k with yoy earnings +4.5%

–ISM Mfg released yesterday with a print of 64.7.  Oh sure.  It’s been higher than that.  In 1983.  Dude: 1983.  I don’t think they even said “dude” back then.  Have to wait until 1987 for Aerosmith’s  Dude looks like a lady.  Anyway, was 1983 anything like today?

Let’s start with some economic data from year-end:

Inflation (CPI)  3.8% (and falling)

Unemployment  8.3%

Fed Funds 9.5%(who says there can’t be inflation with labor slack?)


Michael Jackson’s Thriller released.
Microsoft Word was launched.
The UK introduced the 1 pound coin.

More music: Bonnie Tyler’s Total Eclipse of the Heart.

Now you’ll have that stupid song stuck in your head all day.  You’re welcome.

And, in a nod to my colleague Trent:
She Blinded Me with Science

Here are a few headline snippets:

On March 3, 1983, he [Ronald Reagan] predicted that communism would collapse, stating, “Communism is another sad, bizarre chapter in human history whose last pages even now are being written.” In a speech to the National Association of Evangelicals on March 8, 1983, Reagan called the Soviet Union “an evil empire.” 
–[Parallels today: the US is moving closer to communism and the President still puts Russia in the ‘evil empire’ category].

Apr 1983

Keith Richards appears on the cover of Guitar Player

In 1983, two separate research groups led by Robert Gallo and Luc Montagnier independently declared that a novel retrovirus may have been infecting AIDS patients, and published their findings in the same issue of the journal Science.

Vanessa Williams Becomes the First African-American Miss America

The Big Chill is a 1983 film about a group of baby boomer college friends who reunite after many years and explore the aftermath of the 1960s.

North Korean Operatives Detonate Bomb in Rangoon in Unsuccessful Attempt on Life of South Korean President, Chun Doo Hwan

Scarface is a 1983 epic crime drama film directed by Brian De Palma, written by Oliver Stone, and starring Al Pacino as Tony Montana. 

“[Frank Lopez] Lesson Number One: Don’t Underestimate The Other Guy’s Greed! [Elvira Hancock] Lesson Number Two: Don’t Get High On Your Own Supply.”

Posted on April 1, 2021 at 5:51 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

New curve highs at quarter end

April 1, 2021

–The quarter ended with new highs in the curve.  2/10 up 0.8 to 158.3.  Red/gold euro$ pack spread (2nd to 5th year) just over 182 bps.  New high for peak one-yr euro$ calendar:  EDH23/H24 and EDM23/M24 tied at 77.5 bps.  This, as Biden announced his massive tax and spend plan for infrastructure and SPX made a new all-time high before a modest pullback into the close.  Implied vol firmed significantly in back dollars, supporting the move towards higher yields and further steepening; straddles up 1.5 to 2 bps.  As examples, 2EU 9800 straddle from 37 Tuesday to 38.5 yesterday.  3EZ 9812^ from 66 to 67.5.  While Friday’s payroll data could change the picture, price action and the curve signal a move to still higher rates.

–Worth a note that May Corn is at a new high this morning 578.  After spending Feb and March bouncing around 530 to 550, a bullish USDA grain report sparked a close above 564, with further strength today.

–Jobless Claims today expected 675k from 684k.  Manufacturing ISM expected 61.5 from 60.8.

Posted on April 1, 2021 at 5:01 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Pinning the 5y yield

March 31, 2021

–One large trade to high-light yesterday, a buy of 25k FVM 123/122/121 p fly 9 to 9.5.  Settled 8.5 vs 123-18.  Max value at expiry is of course at center strike of 122, around 1.20% vs current 5y at 91 bps.  Seems far away until one considers the initial taper tantrum high in the 5y yield was 1.61% in July 2013 and ultimate high was 1.85% in September.  I’ve attached a continuous futures chart, which indicates just how lofty we still are given continued massive fiscal spending during the grand re-opening.  There was also a late block buy of over 3k WNM 182-28, just above $1m DV01.  WNM settled 182-12.  Note that 5/30 continues to drift lower, now 148.5 from a high in March of 162, and that the two trades cited above, taken together even though done independently, support the flattening of 5/30.  Action is moving to the belly.  By the way, during taper tantrum, 5/30 ranged between 210 and 235 bps, ultimately reaching 250 at the end of the year.  Again, the tantrum might not be the proper road map, but modest flattening in 5/30 doesn’t really indicate that the move is over.

–New high, but just barely, in euro$ curve.  Red/gold now at 180 compared to 2/10 at 157.5. Steepness continues to move forward on the curve.  

–Biden set to announce $2 trillion plus infrastructure plan today.  ADP also released expected 550k.

Posted on March 31, 2021 at 5:46 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Market focuses two years forward for Fed changes

March 30, 2021

–Rumors of NFP even greater than the expected +650k and Wednesday’s expected $3 trillion infrastructure plan conspired against fixed income on Monday (with follow-on new lows this morning).  New Fed Governor Waller categorically denied that the Fed will keep rates low to help fund the deficit.  I’ve included a couple of speech snippets below, but omitted the hot mic, “We’re not Turkey, you know!”  

–The ten year note rose 6 bps to 1.718%.  Gold eurodollars (5th year forward) made new lows, falling 7.625.  Red/gold pack spread posted a new high, just under 179 bps. with 2/10 just shy of its recent high of 158.  The interesting aspect of yesterday’s curve trade is actually the jump in reds to greens, 2nd to 3rd year.  Net changes: Reds -1.875, Greens -6.625, blues -7.0 and Gold -7.625.  The kink here is obviously reds/greens….as if the Fed can hold the line on rates for the next two years (through reds) but will be nudged into action by the market by March or June of 2023.  Similarly, 2’s/5’s had a nice boost of 3.4 bps yesterday.  

–I’ve attached a chart of EDU2/EDU3/EDU4 futures butterfly which captures this dynamic, having jumped from -8.5 to flat in a couple of days as EDU2/EDU3 widened much faster than EDU3/EDU4. (thanks DK).  

–Seller yesterday of EDZ1 straddle at 8.0, which then settled 8.5.  Sort of amazing to me that with Archegos related stress at Credit Suisse and Nomura the market feels comfortable that nothing can happen over the next nine months into year-end.  I’ll bet the Fed is happy they allowed banks to engage in share buybacks and dividends again, as they liberally employed off-exchange, off balance sheet CFD’s (contracts for differences) to abet Archegos.   Buyer of 25k EDM1 9981.25/9975p 1×2 for 0.25 appears to be a roll up. 

–Big Dallas Fed Mfg survey at 28.9 vs 16.8 expected.  Price subsets also jumped.  I have a cousin who owns a machine tool shop in St Louis (Precision Tools) who told me yesterday: “We have only seen a very modest increase in our raw materials prices, maybe 4-5% and this just recently occurred.”  Half full can focus on “modest increase” while half empty can focus on “4-5% just recently”.

WALLER comments:

…Because of the large fiscal deficits and rising federal debt, a narrative has emerged that the Federal Reserve will succumb to pressures (1) to keep interest rates low to help service the debt and (2) to maintain asset purchases to help finance the federal government. My goal today is to definitively put that narrative to rest. It is simply wrong. Monetary policy has not and will not be conducted for these purposes.

Consequently, the argument goes that a hot economy may cause substantial inflation pressures that are hard to rein in politically, and which ultimately harm Americans in the longer run. This view is backed up by the political economy literature, which argues that having monetary policy under the control of political authorities may lead to excessive inflation and economic volatility that is not socially optimal.11 Put another way, it can lead to an unstable economy, on which households and businesses cannot rely.

Posted on March 30, 2021 at 5:28 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Price Discovery

March 28, 2021 -weekly comment

Daily chart of DISCA (Discovery)

Someone “discovered” stocks don’t always go up.  Above is a chart of Discovery Inc, one of the names in Friday’s block trade purge.  There’s a lot of talk about the $10 billion-plus block sales on Friday, and the fund that was liquidated.  It’s worth noting just a couple of the market cap changes.  From March 22 to Friday, Baidu (BIDU) fell about $20 billion in value, with Discovery losing an equal amount since March 19.  In fact, BIDU closed at 340 on Feb 19, and 208.61 on Friday, so the loss in market cap since mid-Feb is over $45 billion.  Granted the closing price is still above the closing level for 2020, but these were massive moves.

From recent highs to Friday’s lows many of these stocks were cut to HALF PRICE.  Here’s a list of stocks with highs from March 23 to lows on Friday March 26:

Baidu (BIDU)                      263.71   to            174.05

Tencent Music (TME)       32.24    to             16.31
Vishop (VIPS)                      46.00    to            24.98
Viacom (VIAC)                    96.34    to            39.81
Discovery (DISCA)            72.42    to             34.60
Farfetch (FTCH)                 61.46     to             41.25
IQiyi (IQ)                              28.97     to             14.60
GSX Techedu (GSX)         83.57     to             29.40

I don’t know this list to be all inclusive.  All still closed above the 12/31 closes, though some just barely.  All had bounces off the lows.  News reports claim the fund was highly leveraged and couldn’t meet margin calls.

**Late in the day at Goldmans offices:  “We cleaned up all the stocks right?”  “Yes, got out of everything.” “Good, I’m about ready for a cold beer.  Where’s that annoying intern that keeps claiming he’s over-worked?“  Intern returns, clutching trading statements. “Boss, it looks like these guys might have been short SP futures as a hedge to their long stocks.”

I’m just joking of course, but could something like that have accounted for the ramp in the last hour of the day in ESM1 from 3908 to 3968 from 2:50 to 4:00? 

We’re in a time where a loss of billions in a given fund barely causes a ripple.  It’s not like 1998, where a loss of $5 billion by Long Term Capital Markets (LTCM) nearly brought down the system and sparked a bailout engineered by the Federal Reserve.  It’s just a “one-off”.  Like the ship stuck in the Suez Canal.  It’s not as if there are currency devaluations and defaults like the 1997 Asian crisis and 1998 Russian crisis.  Turkey… it’s a one-off.  Just a temporary block in the plumbing.  It seems to me we’re seeing a lot more “one-offs” recently.

It’s somewhat interesting that in 1997 to 1998 as the Asian Tiger crisis and LTCM unfolded, the ten year treasury yield went from nearly 7% to a capitulation low of 4.2% in the beginning of October 1998.  The lack of buying in the ten year now underscores the nonchalance of the market with respect to possible risks.  Or, maybe there IS buying, but massive supply nullifies the chance for a yield decline from what are already low levels, especially with inflation signals percolating.   

While yields did fall on the week, with tens -6.8 bps from 172.6 to 165.8, the trend higher is still intact.  The back end of the Eurodollar curve remains notably weak.  EDU’25 closed at 9793.0, just 4.5 bps above the lowest close of the move which was the previous Friday at 9788.5.  Once again, it’s worth noting that the ultimate low close for the second gold (18th quarterly) in the taper tantrum of 2013 was in September at 9617.0.  Over 175 bps lower than the current level.  The ten year topped at 3% vs 1.66% now.  Perhaps the tantrum isn’t a suitable roadmap.  However, we’re looking for nonfarm payrolls to be about 650k on Friday.  Pre-covid there hasn’t been a payroll number above 400k in the past 20 years except for one post-GFC reading in May 2010 at 540k.

Truly interesting website on John Mauldin’s weekly piece, WTF Happened in 1971, (when Nixon abandoned the gold standard).  It appears to be a huge inflection point.  A lot of charts.  In the 70’s inflation was running 5-10% and started 1980 around 15%.  Fifty years ago.

Another informative article by Harley Bassman last week on vols and convexity


The peak one-year ED calendar on the curve is still EDM23/M24 at 72.5.  High settle has been 76.5 on 19-March.  Interesting to note that greens to blues (3rd to 4th year) has been the steepest part of the curve.  In part, this is due to the libor transition.  While one-year calendars from greens to blues declined a few bps this week, blues to golds made new highs.  As an example, EDM4/EDM5 closed at 55 on 19-March, but settled 56.0 on Friday with a new high print of 57.  I find the direction of the blue/gold pack spread highly correlated to 10/30 treasury spread.  The thirty year bond remains vulnerable to further inflation pressures.

UST 2Y15.213.9-1.3
UST 5Y89.785.4-4.3
UST 10Y172.6165.8-6.8
UST 30Y244.8236.6-8.2
GERM 2Y-69.5-71.5-2.0
GERM 10Y-29.4-34.6-5.2
JPN 30Y66.766.2-0.5
CHINA 10Y323.7319.8-3.9
EURO$ M1/M29.58.5-1.0
EURO$ M2/M344.042.5-1.5
EURO$ M3/M476.572.5-4.0
CRUDE (active)61.4460.97-0.47
Posted on March 29, 2021 at 5:29 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Margin call

March 29, 2021

–Now it’s fallout from Archegos as Credit Suisse and Nomura warn of losses related to Friday’s fire sale position liquidation.  As Kevin Spacey playing Sam said in the flick Margin Call, “Forty percent done by ten fifteen, by eleven o’clock all your trades have to be gone, because by lunchtime, word’s going to be out and by two o’clock you’re going to be selling at sixty-five cents on the dollar if you’re lucky.  Then the Feds are going to be in here, up your ass, trying to slow you down.”  Well, they didn’t quite achieve 65 cents on the dollar on the late stuff.
–ESM has given back a portion of Friday’s late ramp-up (now down 22).  Fixed income barely reacting.  On Friday, the ten year inflation breakeven (ten year yield vs inflation-indexed note yield) edged to a new high of 235.7 bps.  Summers in a tv appearance Friday: “The idea that it [inflation] can’t rachet up quickly is just plain wrong.”  
–While 2/10 spread is 6 bps off the recent high of 158, (as of Friday close), red/gold eurodollar pack spread is only 4 off the high of 177.125.  Back end of dollar curve remains well offered, with golds closing -6 on Friday.  The gold pack (avg EDM’25, U’25, Z’25 and H’26) settled 9788 or 2.12%. 

Posted on March 29, 2021 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Mark Twain market

March 26, 2021

–Tens ended unch’d yesterday, though the curve steepened as a couple of late +TY vs -WN blocks went through (details below).  10/30 rose 2 bps to 72.1.  Steepening also apparent in the back end of the dollar curve with the blue back +0.625 and gold pack -1.625 (blue/gold pack spread is directionally correlated with 10/30).
–Chart attached shows that the dollar index pierced the 200 day moving average with the potential for further gains.  Stocks staged a surprising rally from early morning weakness.
–ZH has a story citing the Financial Times that Credit Suisse is considering using its own capital to reimburse clients who lost money ($3 billion) in funds related to the Greensill collapse.  In the “history often rhymes” category, some might recall that in May of 2007, Bear Stearns injected its own capital in two collapsed mortgage funds.  Stocks took a modest dip after that news, before going on to make new highs.  So….everything’s fine.  Rumors of my demise are greatly exaggerated.
–News today includes the Fed’s favorite inflation indicator, Core PCE prices, which are expected +1.5.  On a month to month basis Personal income expected -7.2 and Spending -0.8. 
–April treasury options expire today.   

+8536 TYM 132-00 vs -2087 WNM1 183-29
+12506 TYM1 132-03 vs -3036 WNM 183-30

Below is a very loose reference to Mark Twain riverboat stories…


Posted on March 26, 2021 at 5:46 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Whip Inflation Now

March 22, 2021

–Turkey’s Erdogan sacked the head of the Central Bank Naci Agbal, because rates were too high.  Here come capital controls.  –Interesting video from 1978 featuring Jimmy Carter’s plan to stop inflation (I believe it was posted by Eric Peters of One River Asset Mgmt).  It’s all about gov’t austerity: “The gov’t has been spending too great a portion of what the nation produces.”  

–Contrasts couldn’t be sharper today.  The US has the central banker Turkey would love…low rates forever.  The US gov’t is spending as much and as fast as it can.

Jimmy Carter-Anti-Inflation Program Speech (October 24, 1978)President Carter defines what America needs and what he plans to do in order to stop the progress of

–WIN, an acronym for Whip Inflation Now! was started by Gerald Ford in 1974.  In 1978 it was still Carter’s number one problem.  Not always transitory.

–Friday featured new curve highs with 2/10 at 158 bps and red/gold pack spread 177.  Back end of the dollar curve was especially weak with blues and golds (4th and 5th years) down 5 to 5.5 bps even as tens closed close to unchanged.  Peak one-year calendar is EDM23/EDM24 at 76.5 bps, up 6.5 on the week.  EDU1/EDZ1 made a new high Friday at 7.5, even as EDZ1/EDH2 remains pinned to its recent low at negative 4.  The market is already concerned about year-end pressure, which may have negative connotations for credit in general.–Treasury auctions twos, fives and sevens this week.  Powell speaks today, and appears with Yellen in front of the House tomorrow.

Posted on March 22, 2021 at 5:26 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options