Everything you need to know is in a Dead song
January 28, 2022
Set up, like a bowlin’ pin
Knocked down, it gets to wearin’ thin
Truckin’ Grateful Dead
–If you just look at EDM’24 from yesterday’s trade, you might say, “What’s the big deal? Nothing moved. EDM4 is down half a bp.” However, EDH’23, the weakest contract, was down 12.5 bps and EDM’27, the strongest, was UP 10.5. I.e. massive curve flattening. Powell was somewhat dismissive of a reporter’s question about the flatness of the curve at Wednesday’s presser…paraphrasing: “2/10 is about 75 bps, and that’s fairly steep, within the range of what is usual.” Well yes, it WAS about 75 but yesterday fell 13.5 bps to a new recent low of 62.4. Red/gold euro$ spread settled 21.5 down 19 bps, only about 1/4% from the inverted low of 2018. 5/30 closed 43.3, down 6.8 to a new low for the move, and likewise only about 25 bps from 2018’s low. From the KC Fed paper in October of last year: “A flat or inverted yield curve may signal pessimism about the economic outlook. More importantly, however, it can also materially affect firms that profit from the spread between short- and long-term interest rates, such as banks and investment funds.” Helpfully, Bloomberg today is leading with a story about the possibility of an initial 50 bp “shock and awe” move from the Fed. Dopes.
–Add into the mix Powell’s comments about federal gov’t stimulus, it will be negative this year. After yesterday’s report of 6.9% Q4 GDP growth, the government’s contribution will now be one of restraint. Is Robinhood’s (HOOD) plunge of 6.5% to just 11.61 from an average of about 41 in October and Sept last year a reflection of what happens when the gov’t checks run out? Or should we just consider AAPL’s $30b profit and say the private sector will gracefully transition from gov’t support? How will April’s tax date affect things? In the very short term, inflation remains the number one issue, with PCE prices released today, expected 5.9% from 5.6% last. U of Mich inflation expectations also released.
–A friend pointed out the price of the expiring Feb Nat Gas price, +1.988 to 6.265 (while NGH2 was only +0.247 at 4.283). Just a one-off supply demand blip I’m sure, but a 47% rally in a day is still notable. Another friend said conditions in the muni market may be the worst in recent history, with bid/ask spreads on high quality bonds 20 to 30 bps wide. Bid/offer sizes in treasuries and euro$’s seem to have dwindled recently as well. There was a buyer yesterday of 10k Feb week-1 (emp day) 122p for cab7, and of some way out US puts also on Week-1 Feb. Every so often, a Federal Reserve bank puts out a paper decrying reduced liquidity in the treasury market, noting possibly broader (dire) ramifications. Well, how’s it going to be when the Fed starts cutting the balance sheet? I figured it might be time to buy some vol, so I checked Feb VIX calls. The 60 call was 80 cents bid! I bought some anyway, just to ensure for the broader trading community that a crash would thus be averted, at least until Feb 17.
