Closing out the week
October 11, 2024
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–You’re not going to find this interesting, but I’m throwing it out there anyway. On Wednesday, SFRZ5 settled 9655. The October midcurve 9556.25^ settled 15.25 with two days to go (expires today). Pumped up, because of Milton and the CPI data, both of which came and went by yesterday afternoon. SFRZ5 settled up just 1.5 at 9656.5 yesterday, and the Oct midcurve straddle lost over half its value, settling at 7.25. The call settled 3.75 and the put at 3.5. Riveting tale right? But it’s not over! SFRZ5 rallied post-settle to 9661.0. So the call that settled 3.75 was in the money by 4.75. Not sure what sparked the post-settle rally; settles vs late prices are as follow: Z4 9565.5s, up to 68. Z5 9656.5s to 61, Z6 9660.5s to 64 and TYZ4 112-025s to 08.
–Vol was sucked out of the Nov treasury options as well of course. TYX4 112^ settled 1’07 Wednesday against 112-065, but just 0’61 yesterday vs 112-025. Nov expires one week from today. TYZ 112^ went from 2’17 to 2’13.
–Nothing particularly surprising about premium evaporation after large events, but underlying price movements still seem random. Of course, Atlanta Fed’s Bostic comment just before the 30yr auction sparked selling:
I’M OPEN TO NOT MOVING AT ONE OF THE LAST TWO MEETINGS IF THE DATA COMES IN AS I EXPECT -WSJ
But the auction was well received with USZ4 trading near the low of the day just above 120-00, and settled 120-06. This morning Goolsbee speaks as a counterweight to Bostic. PPI also being released, expected 0.1 m/m with Core 0.2, vs 0.2 and 0.3 last. Michigan expectations as well.
–Put buyers on SFRZ4 (both Nov and Dec) did well on this sell-off. For example, a few weeks ago there was a buyer of 80k or more SFRX4 9562.5/9550ps for 0.5. Settled yesterday at 3.5 (6.0/2.5). They’re going back to the well (though at less advantageous entry) buying over 30k SFRF5 9575/9562.5ps for 2.5 to 2.75, settled 7.25, 4.5 ref SFRH5 9604.5.
–It seems as if the idea of fiscal austerity is creeping in… I think (forced) austerity will be a 2025 theme in the US.
From MNI:
-Gilts Risk Buyer Strike If Borrowing Surges, Citi Economist Says…UK 10-Year Real Yields Headed for 11-Month High…gilts risk a “buyers’ strike” if fiscal rules are relaxed too far to borrow tens of billions for investment…IFS says Reeves has to raise taxes by £25b at the budget Spending has to increase by £30b to avoid austerity
(see also George Austin of PricingMonkey https://www.linkedin.com/posts/george-austin-a9725b72_uk-giltsthere-has-been-much-talk-in-the-activity-7249390365022052352-Y1z1?utm_source=share&utm_medium=member_desktop
For more on inflation see Michael Ashton’s summary (snippet below on college tuition, emphasis added).
But it wasn’t just transportation goods and services, either. This is the time of year when the jump in college tuitions happens. And it looks like the jump in tuitions this year is the largest since 2018. The seasonally-adjusted numbers will smooth this out, but that means tuition is going to be adding a little more over the next 12 months than it added over the last 12 months.
This is also somewhat surprising. Normally, when asset markets are going gangbusters we tend to see smaller increases in tuition because endowments are doing well and the financial model for colleges is basically (exogenous cost increases we don’t really try to control, minus endowment contributions or federal support, divided by number of students). If markets are doing well and college tuitions are still accelerating, it implies an increase in costs. My guess is that insurance is part of that, but so will be teachers’ salaries. Provision of education is ‘labor intensive,’ and wages continue to refuse to slip back down to the old levels.
https://inflationguy.blog/2024/10/10/inflation-guys-cpi-summary-september-2024/
