Dance Through It
Oct 22, 2019
–Once again near euro$ calendar spreads ticked to new highs as yields rose. EDZ9/EDZ0, the most negative one-yr calendar, settled -34.5, right at the recent high, while EDH0/EDH1 made a new high at -18.5 and EDM0/M1 made a new high at -10.5. The red/green (2nd to 3rd year) pack spread rose over 1 bp to +3.0. The price action can be attributed to the idea that the Fed’s expected ease next week is supporting near contracts relative to the backs, or it can be attributed to supply considerations as the Treasury auctions 2’s today followed by 5’s and 7’s Wed and Thursday. Or both. It’s worth a mention that there was a buyer of 10k EDZ21/EDZ22 yesterday at +5.5 (settled there). Though I don’t have prices posted here, near calendars are negative (indicating a bias toward further ease) and back calendars are positive, which signal a return to ‘normalcy’. Eventually. EDH0/H1 is -18.5, EDH1/H2 is +3 (the pivot) and EDH2/H3 is +7.
–Tens rose 4.5 bps to yield 1.792%. 2/10 pushed to a new high of 18. The Oct/Nov FF calendar settled -21.0 – high confidence of a 25 bp cut at next week’s meeting, but after that the picture gets cloudy. What we’re NOT really seeing is demand for puts as rates push higher. For example, last Thursday there was a buyer of 50k TYZ 129p for 12, and on that day they settled 13 vs 129-29. Yesterday, this 20 delta put settled 15 vs 129-20. So the puts are up only 2/64s (or 1/32) on a drop of 9/32’s in futures. From all the warnings of BOND BUBBLE that I’ve heard recently, you’d think puts would be in high demand. For now, the market is dismissive of downside risks. Of course, that can change in a hurry.
–From Ambrose Evans-Pritchard’s latest, “The use of debt for share buybacks or dividends is called ‘using your balance sheet efficiently’ on the Street. I remember the term well from the mass delusion phase of 2008. Just wait until the funding markets jam shut.” Another warning… but the timing is what’s critical. Any idiot can look around at the world today and harbor suspicions of mass delusion. So take the advice of Chicago band Twin Peaks (or Charles Price in days of old)…Dance Through It. (Gotta problem she’s tryin’ to hide).
