It’s over
November 6, 2024
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–It’s my solemn hope that I don’t have to watch Mark Cuban lectures any more. Apparently Americans don’t like being talked down to. Congrats to the Frenchman (bad news is that he hedged with bitcoin!). And congrats to Musk who went all-in.
–Yesterday brief summary: Curve flatter and implied vol eased from extended levels. On the SOFR strip SFRU5 and Z5 were both -5 on the day (9621 and 9626.5). Two years further down the strip SFRU7 and Z7 were both +1.5 at 9632.5). 5/30 spread made another new low at 27.8 bps. On June 25 this spread was near its low at 10 bps. After the FOMC on 9/25 it was 61, and it’s been pretty much straight down from there (down over 5 bps today, Tuesday). Buyer yesterday of 35k SFRM5 9725/9825cs for 5.25 (settled 5.0)
–This morning the curve is steeper and bonds are printing 116 (118-05s). I mentioned SFRU5 and SFRZ5, currently 9615.5, -5.5 and 9620.0 -6.0 (4:40 EST). SFRU7 is -10 at 9622.5. So SFRU5 to U7 is close to dis-inverting. Stocks at new highs, but it will be tough to hold those gains with long end yields surging.
–Thirty year auction today. FOMC tomorrow with FFX4 continuing to project a 25 bp cut (9535.75s). I am a bit surprised that Jan FF are printing 9559.0 this morning or 4.41, down just 3. A fed cut this week takes EFFR to 4.58%. I would think that Dec now becomes a 50/50 proposition at best (4.58 or 4.33, and halfway is 4.455, a price of 9554.5). Of course, government spending has kept the US economy looking spritely, and for the short term at least, that’s going to change; the baton will be passed to the private sector.
In: Eurodollar Options
Bonds and oil bid this morning
November 4, 2024
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(As of 5:45am EST)
–Rate futures closed out the week on the lows, though Friday’s rate moves have been completely erased this morning. Tens closed Friday +7.7 bps at 4.355%; now 4.29%. Red sofr contracts were -4 with SFRZ5 9630. At the end of September this contract settled 9700. SFRZ4/Z5 one-yr calendar settled at a new high -67. On Sept 11, just prior to last FOMC, it was -132. Auctions of 3s, 10s and 30s start today, $58b 3yr today.
–Election and FOMC this week. WTI CLZ4 is up around $2/bbl as of this note at 71.48. CLZ4/Z5 calendar has moved from a premium of around $2 for the Z4 contract to around $3 this morning. Strong demand for near otm calls; skew bid (chart). Just a reminder that geopolitical concerns also loom large.
In: Eurodollar Options
Felection
November 3, 2024
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It’s FOMC week and the election: Felection. Sound stupid? It’s supposed to.
In the old days, there was no Fed statement. No press conference. There were legions of “Fed watchers” who interpreted policy moves. On the CBOT floor, “Fed time” was around 10:30 to 10:35. Repos or matched sales were big clues on policy.
Elections were pretty much counted and known. Now we have legions of election watchers and we probably won’t know who won for days.
Image is global long-end yields. Last October the refunding announcement favoring t-bills as the financing choice, sparked a yield drop in tens. This October yields have risen.
I just don’t know how to handicap the election. What I do know is that the 10-yr yield rose about 65 bps since the 50 bp ease in September (as the above chart shows). The Nov FF contract is locked in on another 25 for this meeting. So, if we hold true to form, by the end of November the 10y should be about 30 to 35 higher, right? The current 10y is 4.36%. The irony of another Fed cut that spurs long-end selling would put the 10y yield right around 4.70%. A Fed cut takes EFFR to 4.58 and there would be positive carry on tens, a helpful condition in terms of placing debt.
FFX4, November Fed Funds, settled 9535.75. I calculate an ease of 25 will obtain final settlement of 9536.2. FFF5, Jan FF, settled 9563.5. Jan is not a “clean” month, as the first FOMC meeting of the year is Jan 29. Current EFFR is 4.83%. A cut this week takes it to 4.58% and another 25 bp cut in Jan to 4.33% or a price of 9567.0 (ignoring a potential Jan cut). SFRZ4 settled at 9563.0. The market appears comfortable projecting 25 bp cuts.
EFFR 4.58, and another cut into year-end puts us at 4.33. If inflation is around 2.25 and the neutral rate is 2% we’re there. (PCE yoy prices released Thursday were 2.1% with Core 2.7%). There are many who question how the Fed can cut into relatively loose financial conditions (tight corporate spreads, elevated stocks). Those conditions can change rather quickly as evidenced by October’s USD surge. On 9/30 DXY was 100.78. On Friday it was 104.28. This, as SFRZ5 rose 70 bps in yield from 9700 on 9/30 to 9630 on Friday. A rise in forward rates is what will tighten financial conditions. Note that a price of 9630 equals 3.70% for the end of next year which still reflects easing, just not as much. Long-end yields have responded to the idea of a less generous Fed and a government with voracious borrowing needs.
This week brings 3, 10 and 30 year auctions Monday, Tuesday, Wednesday. Sizes $58b, $42b and $25b. If the election is a mess, there’s a risk that the 30y could be sloppy. Note that the MOVE index closed at the high of this year, 132.58. The high in 2022 was 160.72 and the high in 2023 associated with the collapse of Silicon Valley Bank was 198.71.
| 10/25/2024 | 11/1/2024 | chg | ||
| UST 2Y | 408.4 | 419.7 | 11.3 | |
| UST 5Y | 405.3 | 420.6 | 15.3 | |
| UST 10Y | 423.0 | 435.5 | 12.5 | |
| UST 30Y | 449.9 | 455.5 | 5.6 | |
| GERM 2Y | 211.7 | 224.7 | 13.0 | |
| GERM 10Y | 229.1 | 240.5 | 11.4 | |
| JPN 20Y | 177.9 | 177.7 | -0.2 | |
| CHINA 10Y | 215.8 | 214.3 | -1.5 | |
| SOFR Z4/Z5 | -81.0 | -67.0 | 14.0 | |
| SOFR Z5/Z6 | -0.5 | 1.0 | 1.5 | |
| SOFR Z6/Z7 | 4.5 | 2.5 | -2.0 | |
| EUR | 107.99 | 108.35 | 0.36 | |
| CRUDE (CLZ4) | 71.78 | 69.49 | -2.29 | |
| SPX | 5808.12 | 5728.80 | -79.32 | -1.4% |
| VIX | 20.33 | 21.88 | 1.55 | |
The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that R.J. O’Brien believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. Copyright 2024. Alex Manzara.
In: Eurodollar Options
Vol measures elevated pre-election
November 1, 2024
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–Nonfarm Payrolls today expected 105k, though storms and strikes will make data less useful. In general, labor market indicators have been resilient. ISM Mfg expected 47.6 from 47.2.
–Yields little changed yesterday, with 10s 4.278% up about half a bp. However, red sofr contracts were -2 and greens -2.5. While the increase in implied vol has corresponded with the yield rise, the attached chart shows a new recent high for bond vol even as prices stagnated. Of course, the election bid could easily subside as November progresses. It appears as if positions have been pared going into next week, with open interest in TY down 71k (about 1.5%). FV -61k, UXY -18k, US +19k and WN -3k. End of October is also the fiscal year-end for many hedge funds.
–5/30 made a new recent low, marked at 32 bps as of futures settle. This spread was 51 bps a couple of weeks ago (10/21). An interesting CBOT block trade yesterday faded the spread weakness:
FVZ4 106.75p -15k 32.5 (-0.42d equiv -6.3k FV)
FVZ4 106.50p -7.5k 27 (-0.36d equiv -2.7k FV)
USZ4 116.0p +7.5k 1’30 (-0.39d equiv +2.9k US)
I see yield ratio as ~3.2 FV to 1 US, so bond side is a bit light. However, in my opinion FV vol slightly rich compared to US, so makes sense from that standpoint as well.
–Minor bounce in stocks this morning with little impact from AAPL and AMZN. Oil is up a couple of dollars from settlement as Iran warns of retaliatory attacks.
In: Eurodollar Options
Down to the wire
October 31, 2024
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–New highs in near sofr calendar spreads as the 2y area bore the brunt of selling. 2y yield +3.9 bps to 4.156. 10’s were unch’d at 4.272 and 30s -3.5 at 4.482. 5/30 treasury spread new low at 35 bps. SOFR spreads: SFRZ4/Z5 new high -73.5, up 5.5 on the day (9562/9635.5) and H5/H6 -43.5 up 4.5 on the day (9595/9638.5). SFRH6 & M6 are peak contracts on the sofr strip at 9638.5. One month ago on 9/30 they were 9710 and 9708.5, a 70 bp sell-off. Yesterday, reds led, -5.875, greens -3.625, blues -1.25 and gold, the fifth year forward that trade more like the longer end of the treasury curve, up on the day +1.125.
–Stocks under a bit of pressure with MSFT down around 4% pre-mkt and META -3.7%. SMCI was down 33% yesterday as Ernst & Young resigned as the company’s accountant. Perhaps worth a mention, LLY down 6.3% yesterday on earnings; market cap around the same as TSLA.
–New Treasury Sec’y Paulson is vowing to work with Musk to slash gov’t spending. (If the garbage truck stunt doesn’t put Trump over the top I will be astonished). Huge gov’t deficits have been keeping the plates spinning. What worked for Argentina may take some time here in the US. On the other hand, the UK seems destined for new high yields. From Reuters: [UK Chancellor] Reeves’ plans will take the government’s tax take to a historic high of 38.2% of economic output by 2030.
–BOJ kept rates steady. Yen actually rebounding slightly from October’s long slump.
–Q3 advance GDP reported at 2.8% with strong Consumption. Today’s news includes ECI expected +0.9. PCE Prices m/m 0.2 with Core 0.3. YOY expected 2.1 from 2.1 and Core 2.6 from 2.7. Jobless Claims 230k. Chicago PMI expected 47.
In: Eurodollar Options
Yields on 2s and 5s nearly equal. 7y auction today
October 29, 2024
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–Yields rose further with relentless put buying on TY. 10y yield rose 4.6 bps to 4.276%. Curve had a slight flattening bias as 2’s and 5’s were auctioned (both tailed, 0.8 bp on 2y at 4.130% and 1.6 bp on 5y to 4.138%). New recent low on 5/30 spread at 42 (4.108/4.528). I’ve included a chart of 2y/5y spread as yields are now close to equal.
–The 2y yield plunged from the end of June going into the Sept FOMC, from 4.73 to 3.54 (-119 bps). In the same period 5s went from 4.25 to 3.47 (-78 bps). Even as yields bounced since the FOMC, with both 2s and 5s up about 60 bps, the spread has steepened toward zero, as can be seen from yesterday’s auction yields. It would make sense to me that the 2/5 spread would have flattened post-FOMC with the yield run-up, but so far that hasn’t occurred. SOFR prices and straddles on this part of curve:
SFRH6 9642.0 0QH5 9637.5^ 64.5
SFRH7 9637.5 2QH5 9637.5^ 61.5
SFRH8 9633.0 3QH5 9637.5^ 58.5 (straddle spreads have tightened over past couple of weeks)
–Large new buying in TY puts yesterday (TYZ4 settled 110-225, -11.5)
+30k TYZ4 109.5p 30 to 31; 35s
+30k TYZ4 110.0p 44 to 48; 46s
+25k TY wk2 109/108.25ps 8, 7s
+10k TY wk5 WED 111.5p 50 (expires tomorrow)
–News today includes: JOLTS, Consumer Confidence, 7 year auction.
–Alphabet earnings today (also MCD, AMD, Visa).
META and MSFT tomorrow
AAPL and AMZN Thursday
In: Eurodollar Options
Treasury yields higher as geopolitical events fail to awaken safety fears
October 28, 2024
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–As mentioned in weekend note, Friday started with a buy of 50k TY wk1 MONDAY (today expiry) 111.75 call for 3. Likely same player who had bought 50k 111.75 put which expired Friday 44/64s in-the-money, with a settle of 111-02 in TYZ4. Gains continue this morning with TY at a new low of 110-18+ (last at 110-24). Throughout the day Friday there was heavy accumulation otm puts expiring this Friday (NFP day):
Here are the buys, all TY Nov wk1 FRI puts. These puts all expire on Nov 1, payrolls day.
+20k 109.25p 2
+15k 109.25p 3 Settled 4, open interest +37k to 44.6k
+12k 109.00p 2
+20k 109.00p 3 Settled 3, open interest +40k to 48k
+20k 108.75p 3 Settled 3, open interest +20k to 21k
–Weekend events: Israel’s military strikes avoid Iran’s energy infrastructure, so CLZ4 is at a new low for October, down around 3.50 at 68.30. LDP lost its majority in Japanese elections, so the yen is making a new low going into the BOJ meeting at the end of the week, $/yen last at 153.22.
–Front end of SOFR strip down just 1-2, reds, -3.5 with more deferred contracts -4 to -5.
–Attached chart shows U of Mich 1-yr inflation expectations, released Friday at 2.7%, pretty much in the same area it was from 2015 to the end of 2019.
–Today includes 2 & 5 year auctions, followed by 7s tomorrow.
In: Eurodollar Options
The Playbook
October 27, 2024
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Friday began with a buyer of 50k TY wk1 MONDAY 111.75c for 3. These calls expire Monday, 28-Oct. [Symbol on BBG for Mon options is VBYA; VBYZ4 <commdty> OMON. On CME Daily Bulletin VYO]
This was probably a hedge for an Israel response to Iran that could spin out of control. Note too, that on Monday, 10/22, there was a buyer of 50k TYX4 111.75p for 26 ref 111-17. These options expired Friday and were 44/64s in-the-money against TYZ4 settle of 111-02. Likely the same player.
But I want to focus a bit more on otm put buys which occurred Friday, coincidentally following comments Tuesday by Paul Tudor Jones concerning unsustainable US budget deficits (in an interview with CNBC’s Andrew Ross Sorkin):
Financial crises percolate for years. But they blow up in weeks. That’s kind of the history of them, right.
https://www.youtube.com/watch?v=49-2-NWoiLI
Here are the buys, all TY Nov wk1 FRI puts. These puts all expire on Nov 1, payrolls day.
+20k 109.25p 2
+15k 109.25p 3 Settled 4, open interest +37k to 44.6k
+12k 109.00p 2
+20k 109.00p 3 Settled 3, open interest +40k to 48k
+20k 108.75p 3 Settled 3, open interest +20k to 21k
Given a settle in TYZ4 of 111-02 and current DV01 in the contract of $64.20, the 109 strike is about 32 bps away. Last week, cash tens rose 15.7 bps to end at 4.23% (at futures settlement). Also last week, on Wednesday, there was a buyer of 30k USZ4 109p, 10k each at 10,11 and 12. USZ4 settled Wednesday at 118-01, and on Friday at 118-09; USZ4 109p settled 9 on Friday. Roughly 7.7 bps per point in USZ4 contract.
Another comment by PTJ:
I think all roads lead to inflation… I’m long gold. I’m long bitcoin. I think commodities are so ridiculously under-owned, so I’m long commodities… The playbook to get out of this is that you inflate your way out.
Everyone knows the “inflate your way out of it” play. It’s another ploy that can get out of hand. But take a look at the chart below. It’s the Bloomberg Commodity Index since the turn of the century. Same now as it was then. But there are several positive bursts over that timeline showing annual gains of over 50%. Could that happen again?
Another item in the “Could it happen again?” playbook: In looking at periods when 2/10 spread was inverted, the last three times coming out of the inversion the spread rallied over 250 bps: 1990 to 1992, end of 2000 to 2003 and 2007 to 2010. Of course, that typically occurs because of a plunge in the 2y yield as FF are cut. From April 1990 to September 1992, 2s went from nearly 9% to 4%. In 2000, from 6.7% in May to 2% by November 2002, and in June of 2007 from 4.90% to 0.75% by December 2008. Will we see the same sort of decline from April 2024 high of 5%? [2/10 chart below. A bit hard to see but peak is 2.84 in Jan’11]
It’s a big week, capped by the Employment report (and Mfg ISM) on Friday. Election and FOMC in the following week.
Monday: 2 & 5 year auctions. Treasury Refunding Estimates.
Tuesday: JOLTS, Consumer Confidence and 7yr auction.
Wednesday: ADP and Q3 GDP (estimated 3.0). Atlanta Fed GDP Now estimate is 3.3 and the NY Fed Nowcast is 2.91.
Treasury Refunding Announcement. As an aside, it was one year ago when Treasury loaded issuance into the front-end, sparking a Q4 rally from 4.9 to 3.8 in the 10y, coupled with a blistering 14% surge in SPX.
Thursday: PCE Prices, expected 0.2 with Core 0.3 from 0.1. YOY 2.1 and Core 2.6.
Employment Cost Index expected 0.9 from 0.9. Jobless Claims 232k. Chgo PMI 47.0 from 46.6
Friday: NFP expected 110k (impacted by Boeing strike). ISM 47.6 from 47.2.
OTHER THOUGHTS
I ROUGHLY track FV vs US DV01 to vol ratios. Typically, the DV01 ratio is 3 to 3.4, currently around 3.1 ($42.40 in FVZ vs $130.00 in USZ). Vols are 5.65 (FV) and 15.85 (US); ratio 2.8. Generally the ratio of ratios is around 0.7 to 0.8. I marked Friday at 0.92. If it were 1, that would mean that the DV01 ratio was exactly equal to the vol ratio. Very rarely occurs as 5’s are more volatile in terms of yield. My only point here is that 30y vol seems a bit expensive relative to 5y, especially in context of 5/30 yield spread. I don’t have any specific trade to do… just a function of “term premium” expansion on the long end. My only interpretation is that the long-end is vulnerable to a rapid move to higher yields.
| 10/18/2024 | 10/25/2024 | chg | ||
| UST 2Y | 395.0 | 409.2 | 14.2 | wi 408.4 |
| UST 5Y | 387.5 | 405.1 | 17.6 | wi 405.3 |
| UST 10Y | 407.3 | 423.0 | 15.7 | |
| UST 30Y | 438.0 | 449.9 | 11.9 | |
| GERM 2Y | 210.8 | 211.7 | 0.9 | |
| GERM 10Y | 218.3 | 229.1 | 10.8 | |
| JPN 20Y | 174.9 | 177.9 | 3.0 | |
| CHINA 10Y | 212.3 | 215.8 | 3.5 | |
| SOFR Z4/Z5 | -99.0 | -81.0 | 18.0 | |
| SOFR Z5/Z6 | -3.0 | -0.5 | 2.5 | |
| SOFR Z6/Z7 | 7.5 | 4.5 | -3.0 | |
| EUR | 108.70 | 107.99 | -0.71 | |
| CRUDE (CLZ4) | 68.69 | 71.78 | 3.09 | |
| SPX | 5864.67 | 5808.12 | -56.55 | -1.0% |
| VIX | 18.03 | 20.33 | 2.30 | |
In: Eurodollar Options
The price is right. For today, anyway.
October 25, 2024
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–Yields eased a bit, with 10s down 4 bps to 4.20%. No particular meaning associated with that yield level, though everyone might want to take a toke over the next two weeks for medicinal purposes. November treasury options expire today. TYZ4 settled 111-09 and the X4 111.25^ settled 16/64. Not looking for much action associated with today’s Durables or U of Michigan numbers. Peak open interest in Nov calls is the 112 strike with 58k open. On the put side there are 74k open at the 111.25 strike (atm).
–There was a late block in TYZ options: -16k 109.5p at 26, -9k 110p at 35, +33.5k 114c for 14, -17.5k TYZ4 at 111-07. Delta was heavy (would have been ~11.5k futures delta neutral), though on Wednesday there was also new long open interest added to the 114c strike. Yesterday OI was up 39k in the TYZ 114c to 80k. 15 delta option, settled 14/64, it’s the peak point of open interest in TYZ calls. Though vol has gone bid on the move to higher yields, long 114 calls provide some insurance against something crazy happening, (which seems to occur every other day).
–FFX4 settled 9535.5, essentially pegging a 25 bp cut at the next meeting (final settle would be 9536.2 on a quarter point ease). That contract has traded as low as 34 past few days, but there’s little inclination (at this point) to really push for the Fed to stand pat. Current EFFR is 4.83 and FFV4 is right there, at 9517, so a price of 9535.5 might be looked at as a cheap put, BUT, what if there’s another 50? On the SOFR strip, the lowest quarterly is still front Dec, with SFRZ4 settling 9561.5. The peak quarterly is SFRH6 at 9651.5. So 1.25 years apart, yields 90 bps apart, around 4.4% and 3.5%. If I just saw these prices without the context of the election and international strife, I would think it’s reasonable pricing for a gently slowing economy and decelerating inflation. In fact, these SOFR prices hew to the last Fed SEP, which projected end-of-2024 FF at 4.4% and end-of-2025 at 3.4%. The problem is, I can paint scenarios for wildly different outcomes in both directions.
In: Eurodollar Options
Turnaround Thursday?
October 24, 2024
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–Yields pushed a bit higher, punctuated by an aggressive, end-of-day buyer of 30k USZ4 109p for 10, 11 and 12, (10k each). This 5 delta put was bought just after USZ4 settle at 118-01 with futures around 118-03/04; puts settled 9. 20y auction tailed by 1.7 coming in at 4.59%. Ten year yield at futures settle was +3.8 bps to 4.24% and 30y +2.1 to 4.513%. Roll down buyer of TYZ4 114.5/118c 2×1 for 16, adding new longs to the 114c and exiting 118s. Trade size was 40x20k, 114c added 31k of OI, settled 9 and 2 (16 in pkg). Shorter dated put buyers in TY.
–SOFR contracts were -5 to -7.5 from SFRM5 to SFRM8. The 100 wide call spread buyer returned, paying 4 for 40k SFRM5 9775/9875cs, settled 4.0 ref 9620.5. New recent highs in SFRZ4/H5 at -35.5 (9559/9594.5) and Z4/Z5 at -85.5 (9559/9644.5).
–Beige Book indicated slow to modest growth; consumer trading down to lower priced products.
–Stocks were lower and DXY higher, but TSLA’s stronger than expected results seem to have sparked reversals. As of this note, ESZ4 currently +25 at 5862.75. GCZ4 posted a key reversal: new ath, outside range day, closed lower. (2772.6 H, 2722.1 L, 2729.4s). Silver nearly the same. Warning sign on precious metals, but a close above 2773 in GCZ4 would indicate another large leg higher.
–As mentioned yesterday, treasury vol is surging. An election note by Harley Bassman, inventor of MOVE index is below.
https://www.convexitymaven.com/wp-content/uploads/2024/10/Convexity-Maven-2024-Election-Special.pdf
–I would just note the following settles for 111 straddles on TYZ4 underlying, which settled 111-01
WED 10/30 0’48
FRI 11/1 1’06
FRI 11/8 1’46
So a spread of 22/64’s for the 2 days from Wednesday to Friday, with Friday 11/1 being the last employment report before the election and PCE released on 10/31
And 40/64’s for the week that captures the election and FOMC
Today:
Job Claims expected 242 from 241
S&P Mfg PMI 47.5 from 47.3
Services 55.0 from 55.2
Composite 53.8 from 54.0
Also New Home Sales and Durable Goods Orders
In: Eurodollar Options
