Breakout?
October 23. 2020
–This comment written pre-presidential debate.
–At futures settle I marked ten year yield at 84.4, up 4.7 on the day. Half hour before cash close it had pressed higher, to 86.5. On June 5, the high yield was 89.6. The curve steepened across every measure. 2/10 up to a new high on the year 69.1, +4 bps. 5/30 128.6, up 2.5 to 128.6, also a new high for the year. The only laggard is red/gold euro$ pack spread which rose 3 bps to 59.25, although it was 61 late in the session. (chart attached). The high on June 5 was 62 bps and in March was 61.625. Recent history would suggest it all fades from here, as follow-through in all markets just hasn’t happened. However, if this is truly a breakout then gains may come very rapidly.
–Treasury vol remains subdued. There was a seller of 4-5k TYZ 137.5/140 strangle at 29 early, followed by a sale of 6500 TYZ 137/140 strangle 23 to 22. Settles were 31 in the former (7 and 24) and 23 in the latter (7 and 16). Recall the 50k TYZ0 139/138/137.5 put tree bought from 3 to 5, is short that 137.5 strike and more shorts have been added there. The tree settled 7, but a push below the 138 strike may cause some discomfort. Option activity thus far suggests limited scope for a yield surge. However, look at grains…
I would also note that the BBG Commodity Ag index is at its highest level since June 2019. Do beans lead bonds? Copper is well above 2019 levels.
