Fulcrum word
October 26, 2022
–Ten year yield fell 12.4 bps yesterday to 4.106%. Fives fell nearly 10 bps to 4.26% in front of today’s auction. Consumer Confidence was lower than expected, housing prices are easing. Open interest gives a strong clue as to the power of the FI rally: TY added 96k contracts, TU +26k, FV +44k, UXY +4k, WN +0.5k. The only contract that declined was US, which shed 3k. Implied vol fell, especially in ED contracts, where most straddles lost 2 to 3 bps. SFRZ2 9575/9587.5c spread continued to be bought, around 30k yesterday for 0.75. (140k cumulative). Flows in options featured put sellers and call buyers, though there was a buyer of 40k SFRH3 9550/9500/9450 p fly 5.5 which settled 5.25 ref 9511.0. Can be thought of as selling the iron at 44.5…the trade looks for SFRH3 to languish at the middle 5% strike.
–There was a block seller of FFF3/FFK3 yesterday. Spread settled 46.5 (9554.5 and 9508.5). There are 2023 FOMC announcements on Feb 1, March 22 and May 3. FFF3 at 9554.5 suggests an end-of-year EFFR of 4.455%. If we get a 75 bp hike in Nov (fully priced), EFFR will go to 3.83%, the FFF3 price is right in the middle of another 50 (4.33) and 75 (4.58). The F3/K3 spread seller is looking for Dec to be the last hike; the spread is currently pricing cumulative hikes over the first three meetings of 2023 of less than 50 bps.
–SPX rallied 1.6% yesterday, Naz Comp +2.2%. GOOGL and MSFT post-close results have stocks trading lower this morning, but the indexes have only given back a small chunk of yesterday’s gains. The dollar index is lower, and there are reports of China banks selling, taking USDCNY from a high of 7.3 yesterday to 7.18 today.
–The spread between 3m T-bills and tens got some press yesterday as it appears ready to invert (again). I would just mention that SFRZ2 at 95.39 represents repo at 4.61% with the 10y yield 4.11%; negative carry is a headwind on the entire market and does NOT help the liquidity issues facing treasuries. It’s not until the June’24 SOFR contract at a price of 95.91 (4.09%) that we see a contract with a yield below the current 10y.
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–Elon Musk tweeted this yesterday:
Elon Musk @elonmusk
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8:25 PM · Oct 24, 2022·Twitter for iPhone
–From Zen and the Art of Motorcycle Maintenance (Robert M Pirsig):
“Dialectic generally means ‘of the nature of the dialogue’ , which is a conversation between two persons. Nowadays it means logical argumentation. It involves a technique of cross-examination, by which truth is arrived at. It’s the mode of discourse of Socrates in The Dialogues of Plato. Plato believed the dialectic was the sole method by which the truth was arrived at. The only one.
Also from Zen…
“Phaedrus began to wonder if “dialectic” had some special meaning that made it a fulcrum word…one that can shift the balance of an argument, depending on how it’s placed.”
–Logical argumentation seems to have fallen by the wayside. I suppose if we’re to extend that idea to markets, then unrelenting volatility is a natural outcome.
