Fed support now unlimited
March 24, 2020
–The Fed removed any guise of the illusion that it only would accept top-rated collateral, and has even taken the step to create a special purpose vehicle to support buying anything it feels the need to, while Congress remains on the verge of passing a $2 trillion stimulus bill. This morning, markets are responding with ESM clawing higher and approaching the spike high after yesterday’s Fed announcements (unlimited buying of treasuries and CMBS, at least $75 billion in treasuries each day this week). Yesterday’s high in ESM0 was 2386.00, there is clearly patient buying occurring around 2190 to 2210, and current level is 2333. DXY appears to have left a double top around 103 and now trades around 101.50, another positive sign. Gold has soared $150 in the past three sessions (GCJ0 now 1632) and silver has jumped $2 to current 14.10 (SIK0). Ten year yield yesterday fell 18 bps to 0.75%, but the yield has rebounded to around 83 bps today with implied vol starting to soften. Peak contract on the ED curve is EDH21 at yesterday’s settle of 9967.5, while the highest FF contracts, Aug, Sept and Oct are 9993.5 or 6.5 bps. Curves flattened with 2yr down 6.4 bps and 10yr -18 bps. It’s hard to hold a long-end short position when the Fed announces it will buy everything. On the other hand, there was noticeable buying of TY vs US in futures yesterday off the lows in that spread; 10/30 cash yesterday ended at 58 bps.
–Obviously demand has been and will continue to be crushed (Eurozone Mfg PMI only 44.8), but CLK0 is up 1.60 this morning to near $25/bbl. Markets have priced in a lot of pain; sellers should be nearly exhausted in the short term. April treasury options expire Friday. TYM0 settled 138-06+ yesterday and the TYJ0 138.25 straddle settled 1’21. That’s just about equal to yesterday’s range in TYM which was 1-11.5/32’s. It wasn’t too long ago that TY straddles would trade around 1 point with five weeks until expiration. That was then, this is now.
