Fed’s done buying, carry’s compressed and inflation is 8%. Wanna own the auction?
March 8. 2022
–Ten year yield rose 11 bps yesterday to 1.866 in front of today’s auction (with 30s to follow tomorrow). On the one hand, there’s demand for the safety of treasuries. On the other, who wants to own an asset with a 2% yield when oil is $125/bbl and inflation is raging? CPI is released tomorrow, expected +8.0%. As can be seen from the attached chart, the ten year breakeven- treasury to tip – ended at a new high 0f 292 bps. In other words, inflation expectations are no longer anchored. In fact, most assumptions about economics and monetary policy and investor behavior have lost their moorings. Except for this: the ever-flattening curve is a recession signal. New low yesterday in red/gold pack spread at negative 26.875. 2/10 at positive 24.
–New seller yesterday of about 70k EDZ2 9800/9750/9700 put tree at -2.0 to -1.5. That is, paper bought the 9750 and 9700 and paid 1.5 to 2.0. Settled 1.0, 45.0, 28.25, 17.75 vs 9804.5. The 9800 straddle settled 94.5. Taking the other side of this trade leaves one long 9800p for a credit, which will be collected at expiration (should the world survive) at any level above 9800. At 9750, the 9800 puts are 50 in the money and both other options expire worthless. At a price of 9650, the 9800p are worth 150, but the 9750p are worth 100 and 9700p worth 50, so that’s downside b/e if trade were done flat. Vol remains extraordinarily high, though treasury vol eased slightly yesterday.
