Bonds remain weak going into CPI
January 15, 2025
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–Steeper curve yesterday with some large TY option trades going into today’s CPI data (more below). 2s fell 3.6 bps to 4.36% while 10s were down 1.4 to 4.784%. On the SOFR strip SFRZ5 was strongest +4 at 9591.5 (also peak price). Net changes tailed off from there. SFRZ6 +3 at 9580.5, Z7 +1.5 at 9570.
–TY option trades below. CPI expected +0.4 from 0.3 with Core 0.3 from 0.3. On yoy, 2.9 vs 2.7 and Core 3.3 from 3.3.
These figures are well above Fed targets, of course. In his last speech Waller mentioned ‘imputed’ prices, like those associated with housing, and said the trend was definitely lower if those prices are omitted. Given the loss of housing in LA, imputed prices might become more important again. Bank earnings kick off today: JPM, WFC, Citi, GS.
–PPI yesterday was lower than expected with Core m/m 0.0 vs expected 0.3 and y/y 3.5 vs 3.8. Stocks responded with an immediate knee-jerk higher (which faded) but bonds just can’t seem to get off the mat. Ultimately, TY settled 107-115, +4 and USH 110-29, +2. 30y bond yield pegged near 5%.
–Very near contracts have little fear of a pop in inflation which would cause a Fed response. For example, SFRH5 9568.75/9575 p 1×3 settled at POSITIVE (6.0/1.75 so 0.75, 1 leg over). 9575/9581.25 c 1×3 settled -6.25. 9575c settled 5.0 and the 9581.25c settled 3.75. The puts which are 5.25 otm are 1.75 and calls that are 7.25 otm are more than double that premium at 3.75.
–Huge buy on the day of 100k TYH5 108.5c for 27, 28, 29 covered 107-085, 10 and 11 (~30d). Open interest +98k in calls and 47k futures. There are some big long put positions, a lot in the 107.5 strike both Feb and March. There was a seller of 40k TYH5 106p covered 107-115/12 at 25 down to 24. Settled 25, open int in that strike fell 18k. Obviously there have been large shorts taken through puts in TY, and yesterday there were adjustments. But the covered call buying is not particularly bullish. On a hard break vol would probably move higher. On the upside, vol likely comes out but if the move is large enough gamma will help.
–Just a reminder that Chicago, and every other big city in US, can be dangerous:
Explosives found in Chicago South Side high-rise apartments HVAC worker finds “I came across some C4, some explosives, a rifle, A LOT OF FAKE IDs, a lot of fireman stuff, a lot of police force stuff, it was fake”
