Powell digs into the toolbox
Nov 17, 2020
–Relatively quiet session in rates even as Moderna released positive vaccine news which sent DJIA and SPX to new record high closes. Tens rose 1.3 bps to 90.4 with TYZ0 settling 138-01. December treasury options expire Friday, and it’s worth recalling the 50k TYZ 139/138/137.5 put tree that was bought for 3 to 5/64s a few weeks ago. Pegged it. Settled 49 yesterday with a good chance of the full enchilada on a Friday settle between 137.5 and 138. By the way, Dec puts around the current futures level have the most open interest: 138p with 118k contracts, 137.5 with 121k and 137 with 130k.
–Implied vol in rates remains soft. Jan TY vol at just 3.0 and March at 3.2. There was a buyer of 25k TYZ 136/TYF 135p diag for 3 (sold Dec at 1, paid 4 for Jan). Looks like the trade was an exit. Somewhat interesting in that lower strikes are now more likely to be bought than sold at these paltry vol levels. Previously put sales suggested a cap on yields. This isn’t an apples to apples comparison, but I believe the TYZ put tree was on Oct 20, and I am sure the first price was 3 vs 138-24. Now consider TYF 138/137/136.5 put tree ref 137-205 (everything about 1 point lower). That tree settled 15 (46, 19,12). The vol surface has changed considerably.
–Powell speaks today on a panel at the Bay Area Council. I would expect strong hints to echo Clarida yesterday suggesting the Fed will ramp up the pace of bond buying. Probably USD negative on balance. CNY has strengthened further today, now at 6.5537 vs 7.15 in late May. From Reuters: “The Chinese yuan has gained nearly 9% against the dollar since late May, despite the PBOC taking various actions to temper its strength, including suspending FX frd risk reserves and phasing out the counter-cyclical factor in daily midpoint fixing.” In the middle of last year when China’s ccy was weakening, the fear was that deflation was being exported to US shores. What does the opposite portend?
–Retail sales and Industrial Production today.
