It’s suddenly fashionable to hedge long-end rate risk
August 12, 2020
–Huge sell off in precious metals underscores market fragility. Spot gold fell over $200/oz in the last few days (including this morning) but that move was merely a 50% retracement of the rally since June. Spot gold currently 1930 vs high of 2075 on Friday. Yields are firming, with tens jumping 8 bps yesterday in front of today’s 38 BILLION 10yr auction, to 65.3 bps. Put buying was a strong theme yesterday, and implied vol strengthened on the bear steepener. 2/10 rose 5.3 to 49.6 and 5/30 rose 4.6 to 105.8. Open interest was up in all rate futures aside from 5’s. with tens gaining 19.5k contracts. TYV 138p (around 25 delta) settled 19 vs TYZ 139-04s and added 23.5k in open interest on heavy buying.
–Today’s news includes CPI, expected +0.3 with yoy 0.7 and Core yoy 1.1% vs 1.2 last. PPI yesterday was higher than expected. If lumber were any indication of inflation you’d buy all the bond puts you could, as the Sept contract has nearly doubled from 350 in mid-June to 681 at yesterday’s settlement. The last time the front lumber contract was this high was never. On the other hand, the BBG Commodity Index is just hanging around the 50% retrace level from January’s high to April’s low.
–Eurodollar calendar spreads widened. The lowest one-yr euro$ calendar is now EDZ0/EDZ1 at -5 bps, which is a new recent high. In Sept of 2019, the 2nd to 6th ED spread (now Z0/Z1) closed at a low of -63.5. Aside from EDU0/EDU1 which also settled at a new high of -2.5, all following spreads are positive. The moves on these spreads are quite modest so far, but if there was ever a time to consider synthetic steepeners with midcurve put spreads post-election, now might be that time. The last big winner on those types of spreads was in 2016 as the near part of the curve steepened dramatically on Trump’s victory. For example, on Sept 30, the 2nd red to 2nd green was 13.5, and in two months it was 42. I could see the same sort of move this year, even if Kamala wins.
