Hints of a steeper curve
October 1, 2020
–Yields firmed and the curve steepened as stocks continued their ascent after a post-debate hiccup. Ten year yield up 3.1 bps to 67.7. Thirties up 4.4 to 145.4. 5/30 spread notched a new recent high at 118.4 bps (as the 2y was unch’d at 12.3 bps). Red/gold euro$ pack spread (2nd to 5th year) rose 3.5 to 43.625. Late in the day stocks encountered some volatility as McConnell said the two sides are far from an agreement for a new stimulus package, but the market seems to have concluded that more IS on the way, whether through fiscal or monetary measures. However, the Fed announced an extension of the ban on stock buybacks and capped dividends for big banks.
–As I have mentioned several times recently, a trend is developing in euro$ options favoring long puts and put spreads in blues and golds (4th and 5th year forward). These aren’t huge trades, but are becoming consistent. For example, a buyer adding another 2k 4EZ 9925/9912ps for 2.25 (settled 2.5, now up to 16k long). A buyer of 3EH 9950/9912p 2×3 for 12 (settle 10 and 2.25 so 13.25 for 2×3). This theme supports the idea of a steeper curve, with rates pushing higher in the longer end as the Fed has vowed to keep funding rates low for long.
–There was a large buyer of EDZ1/EDH2 spread for 0.5, 60k, and the spread settled 1.0, at the top of the recent range. A client has noted this period corresponds with the end of libor (and therefore the end of the turn). On the other hand, the turn has already ceased to be much of a factor in this year.
–While a covid vaccine and federal support will keep the economy stable, there are a few more large lay-off announcements being made. Allstate cutting 3200, American and United furloughing 32k, etc.
–In a world dependent on computer systems, it seems as if there have been a lot more glitches recently. Today it’s the Tokyo Stock Exchange which was halted. Microsoft encountered service interruptions a couple of days ago. Next thing you know it’s going to be a microphone malfunction at a debate…
–Dec Corn had its highest settlement at 379 since March. Grain complex has been strong recently. The ag etf DBA started the year around 16.50, made a low of 13.15 in late June and has been rallying since, closing at 14.74 yesterday. Clearly it hasn’t received the same boost as many big stocks which have surpassed early year highs, but the rally may be more durable.
