There IS an alternative
–Meltdown in rate futures suggests possibility of capitulation. Red, green and blue ED and SFR contracts plunged 18 to 21 bps on settle; new lows. Two year treasury at a yield of 4.12% (up 13) and tens jumped 18.6 bps to 3.702% in front of today’s October option expiration. New low in 5/30 treasury spread at -29 bps.
–If prelim open interest data is correct, net changes are indicative of a puke in the short end, though not in treasuries. Large OI changes: EDZ2 -35k, EDH3 -23k (all ED combined -28k). In SOFR: Z3 -36k. U3 -46k, Z3 -38k (all SFR combined -135k). The theme of the Fed holding rates relatively higher for longer appears to be gaining currency. For example, since the CPI release in June, FFF3/FFF4 calendar spread (a rough indicator of Fed action over next year) was negative, forecasting eases. The low in July was -69.5. Yesterday, this spread settled positive 4.5. There was buying of SFRZ2/Z3 (same idea) which closed -10.5, up 14.5 on the day. A couple of early 10k blocks: +SFRU3/SFRU5 at -106 and +SFRZ3/SFRZ5 -91.5 appear to have been closing trades (big declines in OI in U3 and Z3, so someone is taking profit on large shorts).
–Bloomberg has two headlines which capture the mood: ‘Investor Pessimism Hits-2008 Era High in Flight to Cash, BofA Says’ and ‘The Era of Inflation Has Ended – for Asset Prices on Wall St’. SPX is down just over 20% ytd, and the Fed appears to have become a put BUYER rather than seller. At down 20% in 2018, Treasury Sec’y Mnuchin was calling together the heads of the big banks to assure market liquidity. Now, the heads of big banks are in front of the House Financial Services Oversight Committee to be grilled on student loans and green initiatives. At first blush, one might think the BBG headlines are contrarian. However, at a 2yr yield above 4% and 5’s nearing 4%, and tips over 1%, large investors finally have an alternative safe port in which it pays to stay docked (with Mary Ann) OR Tina (Tina Louise as Ginger)
