Beaten down
June 11, 2020
–Stocks are sliding with several news sites attributing the fall to a downbeat Fed while Bloomberg creatively points to fears of a second virus wave. Might as well add social unrest and bombs being launched at the US Embassy in Baghdad. ESU currently down 45 at 3130.50.
–Yields fell yesterday with the ten year down 9 bps to 73.9. The curve flattened with 2/10 down 6 to 56.4 and red/gold pack spread in dollars down nearly 5 to 47.625. Implied vol sank with TY back to around 4%. The atm TYU straddle went from 2’14 on Tuesday to 1’63 yesterday (138.5 strike). The Fed’s dot plot indicates FF rate at 0-0.25 through 2022. Just a fantastic forecast for the euro$ product! (NOW do you understand why there are no market makers in FF options?) The good news is that the Fed’s forecasts are pretty miserable, and Powell pointed to last Friday’s blockbuster employment report as an example of current uncertainty. The EDM1/EDM2 one-year eurodollar was subserviently pounded back to settle 3.5, having peaked Friday at 12.0. In a way, there’s no reason for any one-yr ED calendar to deviate much from zero. Indeed EDM0/EDM1 is -9.5 all the way out to EDM22/EDM23 which is +15. The only one that’s priced “right” is EDH21/EDH22 at -0.5. In terms of ED vol, week-over-week changes: EDZ0 9962^ 16.5 to 14.5, 0EZ 9975^ 19.5 to 17.0. 2EZ 9962.5^ 27.5 to 25.0. You get the picture.
–Maybe the Robinhood crowd will discover the long bond as an investment thesis, or maybe they already have. After all, they seem to like heavily indebted companies on the verge of bankruptcy with costs that far exceed revenues. You get your chance this afternoon as Uncle Sam issues 30s; not much of a yield at 1.5%, but consider the growth… May budget deficit released yesterday at $399 billion.
