Today’s events encapsulate the macro story
February 10, 2021
–On October 9, there was a buyer of 50k 3EH 9900/9912ps vs 9975/9987cs for 0.25. I don’t know if that was the first trade to kick off the interest in blue midcurve options, but it was one of them. Subsequently, a big chunk of the 9912 strike was rolled up to the 9925 put for 1 or 1.5; I can’t recall. In any case, the 9925/9900ps is now 5.75 with EDH4 just below the upper strike at 9923.5. Yesterday, there was a buyer of 125k 3EM 9875 put for 3.5. Settled 3.25 vs EDM4 9912.5. Maybe the guy just likes to trade on the 9th of the month. In any case, downside interest remains, with this trade taking place in front of today’s CPI release, ten-year auction, and Powell’s speech on the labor market. I doubt that any one of those events in and of itself is a catalyst for a renewed jump in yields, but they do crystalize the big issues facing the market and economy: 1) inflation and perceived inflation 2) massive bond supply 3) a Fed that emphasizes improvement in the labor market above all other goals. Worth noting that USD resumed its decline yesterday and is a shade weaker this morning. On the inflation expectation front, the ten year breakeven edged to a new high of 221 bps yesterday.
–A few similar trades occurred following the big 3EM buy, for example +25k 3EU 9862/9937 risk reversal, paying 2.5 for the put. The market is becoming comfortable with strikes above 1% even as front end funding rates are currently in the low single digits (like Chicago’s temperature). The question is, how quickly will those funding rates be forced to rise… We know it will warm up here again. By June.
–I have attached a chart of bond vol, which continues to recede in the absence of put buying there. The last little shockwave occurred before the election, and although that story has wrapped up apart from the impeachment bread and circus, I can’t help but think another flare up is around the corner. However, given the extra juice in US vol as compared to FV and TY (which has persisted since April) it’s understandable to lose big chunks of straddle value when the futures price consolidates, especially going into expiration. On 2/4 the atm 167.5^ was 2’14, yesterday’s 167^ settled 1’48 with ten days to go.
