Yields fall, vol crushed
May 21, 2021
–May equity option and June treasury option expirations today. Yesterday saw yields fall in the context of a flattening curve, with implied vol getting smashed. While TYM was up 14.5/32’s on the day, the TYM at-the-money 131.5 straddle settled at just 15/64’s. TYN implied hovering just above 4%, at the low end of the range. On Wednesday, the blue eurodollar pack (4th year) fell 5.875 bps in the wake of Fed minutes which suggested an onset of taper. Yesterday that loss was exactly erased with blues +5.875. Tens fell 5.3 bps to 1.63%. The 2/10 treasury curve flattened by 4.5 to 148.
–The Fed’s RRP operation yesterday totaled a whopping $351 billion as banks are stuffed with excess reserves. In earlier QE episodes, inflation only occurred in financial assets rather than the real economy. It wasn’t too much money chasing too few goods, it was too much money looking for some sort of yield. Yesterday’s price action felt that way: a levitation of paper assets because excess money is just sloshing around looking for a one-nighter. Of course, the inflation ramifications this time are much more widespread given commodity surges and a shift towards labor that favors wage increases. In any event, the Fed may not be able to wait three and a half weeks for the next FOMC to tweak IOER, and there will almost certainly be a move on tapering at that time. One trade of note yesterday was a buyer of 20k May week-4 TY 130 p for 2/64. These expire one week from today, just before the holiday weekend, with TYU as the underlying (settled 131-19). Likely just some sort of protective trade to cap risk, but could some sort of Fed announcement leak out next week?
