Base effects
April 9, 2021
–Yields ground to slightly lower levels yesterday with tens down 2.3 bps to 163 and TYM settling exactly at 132-00. Comments by the NY Fed’s Lori Logan about aligning the Fed’s purchases with outstanding issues caused a late bid in 20’s, as it’s now expected the Fed will announce an increase in buying there. However, all treasury futures are slightly lower this morning.
–PPI is released today with CPI out next week. I believe yoy is expected 3.8% with Core 2.7%. Base effects are expected to provide strong price increases, whether they are temporary or not is the question of the day. To give an example of base effects, BMW reported Q1 sales up 33%. Not only is it a huge surge, but it was the company’s best Q1 ever. Mercedes also reported blockbuster sales. I saw an article about a private jet shortage. Lumber and corn made new high settles yesterday. Articles abound about a lack of skilled labor.
–A couple of large trades of note: early yesterday there was a buyer of 30k 4EN 9775/9750/9725/9700 put condor for 5.5. Max loss on this trade is the 5.5 paid, max gain is 25 less the 5.5 paid, or 19.5 if underlying EDU5 is between 9750 and 9725 at expiry in mid-July. I have attached a chart of EDM5, currently the first gold, because by July, EDU25 will have rolled to the 1st gold position. If prices remain in a downward sloping channel, then by mid-July we’ll be around the 9725 strike. Voila!
–There was also a large VIX option trade, +200k July VIX 25/40cs reportedly for 2.00 to 2.15. Approx $40 million in premium. Spot VIX is around 16.85, while the July future ~23.00. Obviously the roll is a headwind for the trade, but the recent decline in VIX is perhaps indicative of a bit too much complacency given global tensions with Russia/Ukraine, China/Taiwan, Israel/Iran and the simmering issue raised by the state of Georgia trying to tighten up voting rules with the possibility of open hostility between Meghan McCain and Whoopi Goldberg. :-/
