Unpaid debts and Turning points
March 15, 2022
–“The Ides of March is the 74th day in the Roman calendar corresponding to 15 March. It was marked by several religious observances and was notable for the Romans as a deadline for settling debts. In 44 BC it became notorious as the date of the assassination of Julius Caesar which made the ides of March a turning point in Roman history.”
–It feels like the debts have now come due and it’s time to pay the piper. There are many signs of stress, but perhaps a crystallization is Barclay’s halting new units of oil and volatility ETNs:
“Barclays announced that it has indefinitely suspended issuance of new units of its oil and volatility ETFs. The oil product has the ticker OIL and the volatility product is VXX, which is a cousin to the infamous XIV ETN.
https://www.forexlive.com/news/barclays-suspends-issuance-of-oil-and-vix-etns-20220314/
–Banks are choking on their own derivatives. In 2007 the bell-ringer was the implosion of Bear Stearns sub-prime mortgage funds in June, they were marked to zero by early July. The markets took this news in stride, and the main indexes didn’t top until over a year later. Apart from today’s Barclays tidbit is, of course, the nickel market fiasco, the plunge in China’s stocks which continued today, freezing of Russian assets. Longer dated eurodollar straddles continue to expand in value, a clear, if obscure, sign of stress. While some of the premium expansion is undoubtedly related to uncertainty regarding the Fed’s rate path and can be explained by the move to higher yield strikes, I believe it’s more than that. On March 7 the EDZ4 long green 9812^ was 134. Yesterday EDZ4 9762^ is 158 and a year closer in, the EDZ3 9750^ is 140. Yesterday it seemed as if treasuries should have found more solid footing as risk assets sold off. However, tens rose 13 bps to 2.137%. Investors are selling what they CAN to raise liquidity and pay for what they CAN’T.
–The attached chart is one-year forward March’23 SOFR future which was 9784.5 at 3:00pm, or 2.155% vs the 10y treasury yield, 2.137%. The SOFR rate represents a funding rate for treasuries, and according to this futures contract, has now exceeded the 10y yield. In a year, there will be no positive carry. This date of reckoning has moved forward in time. Jim Bianco noted that the treasury curve has never inverted at the start of a Fed hiking cycle. Um, the red/green eurodollar pack spread is NEGATIVE 19.25. It feels as if the foundations of finance have become quite shaky. We’re probably not far from various groups screaming for a gov’t bailout: “What’s happening now is every bit as bad as covid, doesn’t it merit the same gov’t response?”
