Like putting out fire…with gasoline
January 8, 2021
–The model seems to be that you incite the crowd in a certain direction, then stand idly by as it spins out of control. And I’m talking about the Fed here…monetary accommodation to exceed 2% inflation. Add in the prospect of fiscal fuel and watch runaway asset inflation. The Fed has promised to be “credibly irresponsible” and Clarida speaks today at 11:00 on monetary policy and the economy, where he will bolster that message.
–Curve made new highs yesterday, with 2/10 at 93.2, up 3.6, and 5/30 138.8, up just 0.2. In euro$, red/gold pack spread hit a new high of 88 bps, up 5.625. Ten year tip breakeven to 211.6. The ten year yield rose 3 bps to a new high of 107. The odd feature of the move is that implied vol, especially in bonds, has been declining, as the attached chart shows. There are a lot of reasons to believe that rising yields and a steeper curve will take a breather, and lower bond vol certainly supports that thesis. (chart below). Of course, today’s employment report may also be a factor, with NFP expected +50k, but there are some estimates of a negative print. Rate expected 6.8% with yoy wages 4.5% vs 4.4 last time.
–There were a few large trades yesterday, notably a roll from long TYG 137 puts into TYH 136.5 puts, 45k x 60k. The peak open interest in TYH puts has thus shifted to the 136.5 strike with 183k open. That strike corresponds to a yield around 1.115%, which is the upper channel line on the attached 10y chart. In dollars, a buyer of 20k 2EM 9950p for 5.5 ref 9961, settled 5.25 vs 61.5 and a buyer of about 15k 9937p as well. 0EM 9925/10025 risk reversal, 0.25 paid for the put 40k ref 9978.5.
