And…. it’s gone
February 26, 2020
–Stocks continued to drop yesterday with SPX down another 3% and now lower on the year. Nasdaq is around flat on the year. Bonds on the other hand have made significantly lower yields. Tens fell another 4.2 bps to 1.33%, while 30’s fell 3 to 1.802. Ten year treasury to inflation-indexed spread made a new recent low at 1.54%. On the euro$ curve, the 7th quarterly contract is the highest on the board, having settled 9899 and traded above 9900 (or below 1% yield). The last time the 7th contract traded above 9900 was in Q3 of 2016 when the FF target was 0.25 to 0.50 and EFFR was around 40 bps.
–New low in the lowest one-year euro$ calendar which is the front EDH0/EDH1 spread at -50.75. The low for 1st to 5th was last year -85 bps. It’s a bit harder to make new lows from here, with FF target already so low. Skew indicates the same. As an example, every day when I mark straddle settles, as the ED market has moved to higher strikes, atm straddles have been 1 to 2 bps richer. Using the 7th quarterly, EDU1, atm 9887.5 straddles settled 63.0 on Monday vs 9893.5, but the 9900^ yesterday settled 62.0 vs 9899. It becomes harder to justify equidistant calls a lot higher than puts as ED prices are now so much higher than current libor and approaching the zero “bound”. There was some notable profit taking in ED calls, specifically EDU0 9875c sold at 20.0 nearly 100k with open int declining 64k. Settled 19.25 vs 9877.0. There’s a lot of negative carry…either the Fed signals an ease soon or FI pulls back.
–JPM announced yesterday it would tap the discount window from time to time. This follows Quarles Feb 6 speech to open the window for repo rather than set up a standing facility. If JPM borrows from the discount window, stigma should be removed from what is currently thought of as an emergency borrowing facility. As I mentioned yesterday, this should alleviate end-of-year pressure in Dec contracts. Interestingly, the EDU0/Z0/H1 fly went from 7.5 to 6.0 after this announcement, but came back to close strong at 7.0; it had traded down to 4.0 post-Quarles. However, EDU1/Z1/H2 fly yesterday went from +1.0 to -1.5 with U1 +5.5, Z1 +6.0 and H2 +5.0.
–On a personal note, I sold out some VIX calls yesterday and swapped into canned goods, rice pasta and a case of 3-liter cans of olive oil.
