Turn those machines back on
March 8, 2022
–The old CME trading floor was rich in hypothetical questions and scenarios. “Would you rather take a bubble bath with x, or have to watch Full Metal Jacket, alone, with y?” (both euro$ option brokers). My memory is a little fuzzy on this next one, I think it was originally just stated as an obvious fact of valuation: “I’d rather have T’s head full of nickels than a million dollars”, instead of “which would you rather have?” In any case, in 2011, Kyle Bass famously bought $1 million worth of nickels, on the premise that the metal in each coin was worth 6.8 cents. It’s worth more now. Unlike Duke & Duke, zerohedge is reporting that a unit of China Construction Bank (CCBI) was given more time to meet a margin call on an, ahem, adverse move in the price of nickel, which more than doubled yesterday. It all comes back to the J Paul Getty quote: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” As mentioned yesterday, Zoltan Pozsar posed some hypothetical questions related to exactly this type of financial dislocation in commodity markets a few days ago. Wheat has surged over 60% in two weeks. I guess it’s little wonder that CME stock fell 3.3% yesterday and ICE 2.4%, though surprisingly the former held up better than Nasdaq (-3.6%) and the latter better than SPX (-2.9%).
–Despite wild moves in commodity and equity markets, yields rose yesterday, with tens up 3.3 bps to 1.755%. The two-yr yield was up even more, +5.8 bps, leading to a new low in 2/10 at 20.7. The red/gold euro$ pack spread (2nd to 5th year) fell to a new low NEGATIVE 26.125. Three month eurodollar to SOFR (EDH2 vs SFRH2) ended at a new high above 38 bps. In October of last year, less than 6 months ago, three-month libor was around 13 bps, and 99.875 calls were in play. Without the Fed having overtly moved yet, EDH2 yesterday settled 9916.25 vs a libor setting of 64.286 bps. That’s a difference of over 19 bps with just a week before expiration, when these two rates MUST converge. Obviously, implied vol in rate options has exploded, with treasury vol easily the highest since March 2020 covid. I marked TYM 128.5^ at 3’39 (7.9) vs 128-035 with 74 days until expiry. Just for fun, I looked back around two years ago. On March 18, 2020, TYM’20 134^, then at-the-money vs 134-025, settled at 4’55, 10.8 vol, with 65 days to go.
–Three year auction today, followed by 10s and 30s on Wed and Thurs. The Fed is nearing the end of QT (for now…), with a purchase of $1.825 billion in 22.5 to 30 year bonds. From a ZH article: Kenney (Alberta’s Premier Jason Kenney) noted, “We could discuss how to ship nearly 1 million barrels a day of responsibly produced energy every day from the USA’s closest friend and ally! All it would take is his approval for Keystone XL. Easy.”
