Loquacious Libor
November 19, 2020
–As I’ve gotten older, I’ve learned a couple of things. One, if legging a trade, leg into the illiquid side FIRST. Second, (speaking of liquidity) don’t try to tackle plumbing problems. About the only plumbing job I will handle on my own is changing out a washer on the outdoor hose. When I have attempted the big stuff, I invariably spend a ton of time and a few trips to the hardware store on something a plumber (or my brother) does in ten minutes. It’s stupid.
–Yesterday, EDZ1/EDH2 spread traded 123k in a range from 6.5 down to 4.0, as the powers that be issued statements on libor. Those who had entered libor fallback trades scrambled to pare back, compressing EDZ1/H2 which had traded from -1 to +7 in the past month and a half. Huge volume traded in multiple ED calendar spreads. All this new plumbing is costing hedgers money with random moves, time and money in new legal contracts, regulatory burdens, changed clauses. It’s like a guy running back and forth to the hardware store…and still having a leak. I am not at all confident that a repo blow-up like Sept 2019 couldn’t occur again. Recall, the repo surge at that time is what the Fed used to anguish over. Now there are bigger … and BIGGER fish to fry. I just wonder about the cost of the original “libor rigging” versus these new costs with the improved market-transparent SOFR. Might have been easier to reform libor and keep the credit component. In any case, volumes in ED calendars were huge: 123k in EDZ1/H2 which settled 5.0 (4.5/5.0 late). 93k in EDH2/EDM2 which settled 1.5 and was 1.5/2.0 late. I guess we can score all the lawyers and regulators working on the SOFR transition as economic “growth”.
–Yesterday’s net moves in rates weren’t large, tens ended just 1 bp higher at 88. However, as mentioned there was some jostling around on the ED curve, which makes super low straddle levels seem unwarranted.
–Covid fears are knocking back stocks as NY closed schools.
–I saw a quote from the Fed’s Barkin yesterday: “Total leverage is not at historical levels. That’s what I’m watching.” I had also seen blaring headline that mortgage debt exceeds $10 TRILLION. Barkin’s right, at least on the mortgage side. In 2007 mortgage debt peaked at $10.625T. As of Q2 2020, it’s $10.618T. Mortgage debt hasn’t increased for households, and I think that’s because we’ve turned into a nation of renters in the aftermath of the GFC. So now these apartments are in the Commercial Real Estate column I suppose. With Covid rent moratoriums. We FIXED it. https://www.federalreserve.gov/releases/z1/20200921/html/d3.htm
–Buyer added to TYF 139.5 calls yesterday in 20k. He paid 6, settled 5 ref 137-255. The strike is about 18 bps away, or a yield of 70 bps.
–One last somewhat interesting observation. As mentioned yesterday, the 9962 strike in long dated red straddles has been crushed. For example, EDM22 9975 straddle settled 16.0 ref 9968.5 while the 9962 straddle settled just 14.0. Now look at the blue June midcurves. EDM24 settled 9937.0 and the atm 3EM 9937.5 straddle settled 27.5. The 9950 straddle settled at 28.0, barely different from atm, while the 9925 straddle settled 31.0. Just another reflection of fear at the longer end for higher rates, while reds are convinced the Fed has it all covered.
