The bears are out
January 19, 2022
–Yields are on a rampage higher, with tens up nearly 10 bps to 1.866%. Front EDH2/EDM2 spread jumped 4 to a new high of 35 bps, and H2/H3 one-yr spread to a new high 109. April FF at 9965 are projecting small odds of 50 at the March FOMC. (9967 fully prices one 25 bp hike). The Fed is currently in blackout in front of next week’s FOMC, so there will be no official push-back. Today the treasury auctions $20 billion in 20s which were yielding 2.25% late. TYH2 settled 127-12, which is only about 4.7 bps away from the 127 strike; TYH 127p have 322k of open interest and the delta is now -0.42. Settled 0’40, up 18 yesterday. They ramped up open interest in every treasury futures contract (TY was up 72k), and vol increased: I marked TYH at 5.4, a new recent high. Everything is screaming bear market.
–5/30 spread is edging to a slight new low. At futures settlement I marked 53.7 but it was below 53 later, so it has squeaked below the low made in December . In fact it’s lower than any time since a spike down in March 2020 (covid) which was 51.4. A steep curve is a lubricant for the financial system. Those that are betting on a super aggressive Fed to squelch inflation are getting a bit too enthusiastic. We’ve gone from “The Fed can’t fix supply chain problems” to “The Fed must stop inflation to help the working man afford necessities.” I’m sure an aggressive Fed could help stop the oil price increase and generally curtail final demand which would help suppliers…at a severe cost to equities. CLH2 (March WTI) is just above 86 this morning, having averaged around 71 in December. It’s all part of the green new deal. Funny, in July/August of 2007 WTI was 70 to 80 bbl. By May 2008 it was 140.
