Come see me at the White House…
November 19, 2019
–Yields once again eased lower with tens down 2.6 bps to 1.805%. Another snag in US/China talks yesterday morning sparked a rally in fixed income, and reports of an unscheduled meeting between Trump and Powell underscored the administration’s pressure for easier money and a weaker dollar. While the Fed’s subsequent statement stayed tightly within the bounds of the mandate as required by law, Trump said negative rates were discussed and the meeting was cordial. Summary: If the China negotiations go south, can the administration depend on the Fed to mitigate any fallout?
–The message the markets seem to be taking is that liquidity, if not near term rate cuts, will be amply supplied. Year-end concerns are also fading. FFF0/EDZ9 spread closed at a new recent low of 34.5 with Z9 +1.5 and FFF0 unch’d. EDZ9 9812.5 straddle settled down 1 at 6.5. Stocks remain buoyant and futures are at new highs this morning.
–Red/gold euro$ pack spread (2nd to 5th year) edged to a slight new recent high at 20.625 bps, up half a bp. The demand for near term liquidity should perhaps translate into risk for the back end of curve, but it’s certainly not reflected in bonds or bond vol. With USH0 at 157-31, I marked the Jan 158^ at 3’08 or 7.6 vol, a new recent low. For context, one point in USH is worth just over 5 bps, so that straddle is roughly 16 bps with 39 days to go. By contrast, green Dec 9850 straddle is 17.5 bps with 25 dte. Of course, the belly of the curve is more volatile, but the comparison is interesting.
–Buyer yesterday of 37k EDG0/EDH0 9837/9825/9812 put fly strip for 9.5 to 10.0. This is new (adding). Feb settled 5.0 and March 4.75. Max value of a fly is of course, at middle strike at expiry, in this case max value 12.5 at exactly 9825 or 1.75%. Current 3-m libor has been hugging 1.90%, the Fed effective is 1.55% and SOFR has been 1.57 to 1.59%. (Libor setting will decline after the turn). FFJ0 to EDH0 spread is 22 bps. So if nothing happens in terms of the Fed cutting again, EDH0 should gravitate to the 9825 strike… 1.55% EFF plus 20-23 bp spread.
