Stocks and yields melt
August 15, 2019
–New historic low in 30 year yield closing at 2.027% and piercing 2% this morning. 2/10 yield spread inverted; I marked at positive half a bp yesterday at futures settle. The gold eurodollar pack (5th year forward) ended within 10 bps of new all time highs. New recent low in red/gold pack spread at positive 8.5. This spread had actually inverted last year in early December prior to the last hike. The ten year inflation index not closed at a yield of less than half a bp. I.e. a REAL yield of zero. Ten yr/tip marked at a new low of 1.578%. (market proxy for expected inflation).
–I mentioned in yesterday’s title that stocks had a ‘temporary’ bid from Trump’s tariff tweet. It was more temporary than I would have thought. DJIA, SPX, NASDAQ and Russell were down about 3 pct. (RTY only down 2.85) However Hi-yield etf HYG down less than 1 pct. Do low rates make spreads come in? Or will lenders become circumspect as outstanding debts become a larger percentage of equity with stocks under assault?
–Inter-meeting cut? Probably not. FOMC is Sept 18, just five weeks away, with potential China/US talks just preceding. If there’s no progress in China then look for 50. Aug/Oct settled 33.5. Tempted to sell that and sell some ED calls.
–Implied vol exploded in rates. Examples, TYV atm straddle went from 1’43 Tuesday to 1’52 Wednesday (ref 131-04)., a nominal gain of 8.4%. USZ atm straddle went from 5’52 to 6’20, about the same nominal gain except that the contract itself rallied 2 points and the 30 yr cash bond fell to a new all time low.
–Huge selling of EDH0 9862.5/9900 c spd at 8.5 (settled 15.5 and 7.0 ref 9845.5 EDH0). Open interest increased in both contracts, +109k in 86c to 270k, and +53k in 90c to 294k. Somewhat interesting in light of a decline in total ED futures open interest, down 46k with most of that being in EDZ20, -33k. A decline in futures OI on a strong rally may indicate capitulation. How much actual hedging needs to take place is the FF target goes back to a range of 1.00 to 1.25% as reds are now indicating? Vol in dollars also exploded, with straddles up a couple of bps. Just consider EDH0 9900c for a second, with premium of 7 bps. Breakeven of 83 bps for 3 month libor vs around 2.15% currently. On the other hand, EDH0 9950c were recently bought in size for 1.0 and settled 2.0 yesterday, a quick double.
–An interesting article brought to my attention about RMD, Required Mandatory Distributions from retirement accounts once a person hits age 70.1/2. The law, as it currently stands, requires boomer accounts to start taking withdrawals, i.e. selling stocks. The paper I saw, linked below, indicates $10 trillion in sales over 20 years. Not linear of course, but call it $500b per year. Something to be aware of in terms of market psychology, but the law will likely be changed, and $500b year can be absorbed easily in a strong market.
