Sept 29. US rate markets forecast Ice Age. India cuts 50 bps to 6.75%
–Though it wasn’t a large volume day in interest rate futures, there were a number of notable features. The ten year yield dropped just over 7 bps to 209.5 as SPX fell 2.6% and Nasdaq fell 3%. All euro$ one-year calendar spreads flattened to new lows, for example the peak one-yr spread is EDH16/EDH17, now at only 57 bps, down 3 on the day. The red/green pack spread is just 48.25 bps, also a new low. Red/gold pack spread (2nd to 5th year) closed just under 125 bps. 2/10 treasury spread crushed, down 4.7 bps to just 142.7. Finally, in terms of inflation expectations, Ten yr note to tip spread fell to a new low of just 141 bps, down nearly 7 on the day.
–Equities were of course weak, with the Russell leading the charge as it closed on a new low for the year. Precious metals were routed, likely due to Glencore’s misfortunes. High yield etfs HYG and JNK both went to significant new lows for the year. However, the VIX rally was underwhelming in response. On Sept 1, Oct VIX was 25.82 with ESZ 1907. Yesterday (at the settle of interest rate futures), I marked ESZ 1872, or 35 points lower, while the VIX was lower as well, at only 24.4. So there’s a bit of divergence which could presage a short term bounce.
–Carl Icahn is warning of a financial doomsday, while at the same time endorsing Donald Trump. I guess the only proper hedge for that is to buy Eurodollar 100 calls, which is what someone did yesterday. The 100 call strip in EDU6/EDZ6/EDZ7 was bought for 2.0 in size of 20k and an additional 50k EDU6 100c bought for 0.5, leaving open interest in the latter just under 100k.
