The Fed can’t cure the virus
January 30, 2020
–Yields continued to fall yesterday right through Powell’s press conference, with tens shaving 5 bps to 1.592% (at futures settlement). The Fed raised IOER 5 bps to 1.60% (so it now just eclipses the 10y yield), and directed the desk to continue buying bills at least into Q2. The Fed’s implementation statement continues to specifically reference the reserve level from September, an implicit guarantee to the market that it won’t let the repo surge occur again. At the same time, the CBO projects a trillion dollar deficit this year and beyond. The bonds issued because of those deficits will need to be bought and financed. With REPO. In a logical extension that means the Fed will need to buy more… and more. Interestingly, stocks fell as the press conference was taking place, and are lower this morning as FB results swamped the ‘feel-good’ TSLA report. Of course, the Wuhan virus is spreading and impeding movement of people, goods and services, an overarching threat to economic activity, as reflected by the continuing plunge in copper (off 12% in two weeks).
–In the short end, near eurodollar calendars are making new lows. The lowest one-year calendar is the front EDH0/EDH1 which fell 5 bps yesterday to -38.5. FFF0/FFF1 was down 4.5 to -36.25. Earlier in the month, until a week ago, these spreads had been holding around -20 to -25. That is, the market was leaning toward the possibility of one Fed ease of 25 bps in 2020. Now the market is perceiving one and a half, or certainty of one ease and 50/50 for another. Reds through golds (2nd year to fifth year forward) all rallied 5 to 5.5 bps, so not much change in deferred calendar spreads. Red/gold pack spread settled 20.375 while 2/10 edged to a new low of 17.3.
–There are indications that uncertainty surrounding impeachment will end Friday as the Senate acquits, but if the trial continues, it’s likely another risk for stocks.
–There has been a bit more mention of ‘fifty-cent’, the large buyer of otm VIX calls. Large open positions are in the following strikes: Feb 22 calls which expire 19-Feb were trading 0.65 late and have a whopping 333k of open interest. March options expire 18-Mar, and 25c are around 0.65 with 161k, while 28c are 0.45 and have 212k. Spot VIX was 17.6 at the end of the day.
