Potato heads
February 26, 2021
–Monster day with yields soaring. Belly led the rout, with fives up 17 bps to 79.2 as the 7-year auction was poorly rec’d. Tens up 12.6 bps to 150.8 and bonds rose just 7 to 230.5. Bloomberg noted that the ten-year yield just eclipsed the S&P dividend yield. All euro$ one-year calendars made new highs. EDU1/U2 which had been struggling around 5 to 7 gained 6 bps to close at 13.5. Peak one-year is EDH23/EDH24 at 68.5, it gained 10.5 bps yesterday! Volumes were so large that the CME’s daily bulletin for eurodollar futures shows 0548373 (lacks the needed digit to show greater than 10 million). Blues (4th year forward) were weakest on the dollar curve, down over 22 bps!
–In Oct 2018, Powell said we’re nowhere close to neutral. Stocks tanked. By Christmas, the Fed’s tone changed, and easing followed. The recent mantra is that “we’re nowhere close to full employment”. How does the Fed walk back the vow of endless accommodation, now that the market is anticipating inflation and higher long-end rates? Tighten to flatten the curve? Or hint at YCC? A Reuters piece said Kuroda is calling for “stably low” rates as the 10yr JGB hits 15 bps, above what I believe is the “cap” of 10. Central bank jawboning guidance may not be able to rein in markets that see a lack of institutional support for the purchasing power of fiat currency. Dudley was right about the possibility of a tantrum…and recall that in 1987 it was a bond tantrum of sorts (over several months) that preceded the stock crash.
–Vols exploded in rates. As an example, on Nov 23, about three months ago, I noted these levels: EDU22 9962.5^ 17.0 vs 9967 and EDU23 9950 ^ 41.5 vs 9954.5. At the time, these were the last red and green respectively, long dated straddles. Now three months later, here are prices for the exact same contracts (now in the third slot). EDU2 9962.5^ 31.5 vs 9968 and EDU3 9912.5^ 75.5 vs 9906.5. As another example, the atm TYM straddle settled 2’19 on Wednesday, and 3’07 yesterday. Tens have officially reached the panicky level of over 6%.
–In what is perhaps the final affront to civilization as we know it, Hasbro is removing the “Mr.” from Mr. Potato Head. I had to scroll a big F U last night on my etch-a-sketch.
