Covered call buyer adding in TY
January 16, 2025
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–Yields imploded on a slightly softer than expected Core CPI of 0.2% vs 0.3 exp and y/y 3.2% vs 3.3 expected. Curve flattened. 10y yield down 13 bps to 4.653%. 2y yield down almost 10 at 4.262%. Headline CPI yoy was 2.9% from 2.7% last. Not close to Fed’s target, but the market heaved a sigh of relief and shorts were covered.
–On the SOFR strip, greens (3rd year forward) were strongest, +16.75. Prices on red, green and blue packs (2nd, 3rd and 4th years) are still all nearly the same, just over 4%. Reds 9599.75, Greens 9590.5, Blues 9581.75. I saw a clip that Morgan Stanley is calling for an ease in March. Near contracts are underpriced if that were to occur. For example, FFG5 settled 9567.5, with just 0.5 premium to Fed Effective of 4.33. FFJ5 (April) is after the 19-March FOMC and is a clean month (no FOMC) priced at 9574.5. A cut would put Fed Eff at 4.08 or 9592. One-year calendars in SOFR declined as deferred contracts rallied harder. SFRH5/H6 settled exactly at -25; one ease over that year. (9577.5/9602.5).
–My thesis is that yesterday’s move was a short cover rally, typically associated with a decline in open interest. Indeed, SOFR OI dropped 141k in total. Main drops in M5 -41k (9590, +6.0), Z5 -32k (9602, +10.5) and Z6 -26k (9596.5. +16.0). In treasuries, TU -34k, FV +6k, US -19k, WN -3k. However, the ten-yr contract added open interest of 34k yesterday and 79k in the past two sessions. I attribute this to the big covered call buyer. On Tuesday, +100k TYH 108.5c around 28 covered ~107-10, 30 delta. So that added 30k contracts. By the way, at settle the calls were up 21/64s at 49 and the futures up just over a point, Per 1k, +10500/32s and -300*32.5/32s or -9750/32s. As of yesterday’s close, delta on 108.5c was 47.
Yesterday he continued, buying 40k 109c for 35 covered 108-09, 36 delta. So there’s another 14.4k futures. If he adjusted the hedge on the 108.5c he added around 15k short futures. TYH5 109c settle 36 vs 108-105.
Vol was down on the day with TYH5 108.5^ settling 1’45 or 6.2. Previous day atm 107.5^ was 1’51 or 6.5.
–In SOFR, notable buyer 40k SFRZ4 9650/9700cs for 8.25 (settled there ref 9602s)
–Retail Sales today expected +0.6 for Dec. Philly Fed -5.0 expected vs -16.4 last. Jobless Claims 210k. BOJ next week (hike expected).
–Beige book is old news, but sounded a bit muted. Going into the new Trump era, incentives are going to change dramatically, as evidenced by NFIB surge, Hamas/Israel deal, etc. Below from Beige Book:
Construction activity decreased overall, with several Districts indicating that high costs for materials and financing were weighing on growth. Manufacturing decreased slightly on net, and a number of Districts said manufacturers were stockpiling inventories in anticipation of higher tariffs. Residential real estate activity was unchanged on balance, as high mortgage rates continued to hold back demand.
Below is TY rolling in while, Aggregate Open Interest in blue. 100 dma in green.
