Beyond Payrolls
Dec 6, 2019
–While yields pushed a bit higher on Thursday, several large trades favored a move toward lower rates. For example, early in the day there was a buyer of 40k EDG0 9850/9862/9875 call tree for 0.25 (settled flat; 2.0, 1.25 and 0.75 vs EDH0 9831.5), and late in the day on a negative China headline, there was a buyer of 50k TYF0 130.25 calls for 14 (settled 14, 25 delta, vs TYH 129-10; approx 11.5 bps away). The ten year ended with a yield of 1.795, up 1.6 on the day. Curve was slightly steeper as the 2-yr note was unchanged. In euro$’s, red pack closed -1.125, greens -2.5, blues and golds -3.0.
–Today of course, is the jobs report, with NFP expected 184k vs 128k last, and yoy Earnings +3.0%. My payroll predictions are notoriously bad, but I think this report will show disappointingly low payroll growth, perhaps sub-100k. In any case, the impact of the data will likely fade quickly as the market looks toward next week’s FOMC meeting and the China tariff deadline on Dec 15. In addition, treasury will be auctioning 3, 10, and 30 years next week. The auction amounts are slightly smaller than last month, but the new cash raised is over $50b. One interesting aspect of yesterday’s trade was weakness in the dollar index, probably welcomed by both the Fed and the administration, but might give the marginal non-domestic buyer of treasuries a pause. My position is that even if payroll data is soft, a rally in longer treasuries likely won’t be sustained, even as a China stalemate and impeachment proceedings near.
–With regards to the front part of the curve, it’s worth taking a look at a few spreads. EDZ9 to FFF0 settled yesterday at 32.5, never having come close to re-testing the mid-Sept repo scare of 41.5. The forward spread of EDH0 to FFJ0 is 21 bps (9831.5/9852.5). Call the forward ois/lib spread somewhere around 15 to 22 bps, allowing for a chance of further compression. FFF0 trades 9844.5 so there is no expectation of ease in December. FFF0/FFG0 settled -3.0, indicating a small chance of an ease at the Jan 29 FOMC (but also reflecting slight hedge pressure for a high EFFR on Dec 31). FFG0/FFJ0 settled -5.0; around 20% odds of an ease on March 18. On NO ease, EDH0 should settle somewhere between 9823 and 9829. If there were to be an ease in January, odds of a further cut in March would probably increase to 1 in 3. So EDH0 would then likely trade 9850-ish plus another 8 for March odds. So that’s how the Feb call tree above would target the 9862 strike. The same strike tree in March expiry is also zero (2.75, 1.75, 1.00). EDH0 expires 16-March, FOMC is 18-March.
