Fed’s flows
August 11, 2020
–Stocks have recovered after yesterday morning’s sneeze with ESU at a new high, currently up 23 at 3375.75. Gold and silver are pulling back. Bonds are lower with TY edging closer to the 139.5 strike as three-year notes are auctioned in size of $48 billion today. A scan of news provides possible explanations for the moves: Trump is thinking about cutting the capital gains tax, and the NY Fed released its holdings corporate bonds. According to an article on ZH, 3% of the Fed’s Corp Bond holdings are junk, Skimming through the list there are some issues with 5% coupons or higher! (an anachronism in this day and age) For example, a small piece of Expedia with a 7% coupon expiring in 2025, purchased just above par. Etc. It’s no wonder Simon Potter suggests the Fed simply credit households directly rather than go through the transmission exercise of buying Daimler (and Toyota) bonds and hoping investors pour into stuff that’s riskier. And it’s no wonder that Izzy Englander hired Potter to see if an offshoot of that Fed transmission line could be plugged directly into Millennium. Like a Tesla.
–By the way, the details of the Fed’s Municipal Liquidity Facility were also released, still only showing Illinois as the red-headed step child with $1.2 billion borrowed. Barely enough to pay for the workers on Governor Pritzker’s Wisconsin farm.
–Today we also get PPI, expected yoy core of 0.0. NFIB confidence is already out and pulled back slightly to 98.8; the low in April was 90.9. There’s renewed discussion as to whether inflation could possibly roar back, though it won’t be evident in today’s data, I’m sure. However, the Fed is treating dollars like confetti, so perhaps they will yet be successful in destroying its purchasing power. One can only hope.
–Bond vol was again smushed yesterday with USV 180^ at 4’00 or 7.8 vol. The ten year note yield rose 1.3 bps to 57.2. The euro$ curve was pretty much -1 across the board. In another example of stupid pricing, I noticed that EDM21 9975 puts were 4.0 offer late yesterday ref 9880.5 in EDM1. Time until expiry is 307 days. (They’ve traded 4 in size of 5k this a.m.) Think about the last 307 days, and now forecast that NOTHING will happen in the next 300. Since the start of July, 3m libor has been between 30 and 24. Sure it has edged a bit lower, and sure, the Fed’s buying junk etfs. But 4 bps for an atm put with 10 months! Stupid. THIS IS NOT A RECOMMENDATION TO BUY. IT’S A WARNING NOT TO SELL. Of course, if you sell 1 of these puts and buy 3 of the equally stupid EDM1 9962p for 2, then by all means, go ahead.
Fed holdings
https://www.federalreserve.gov/publications/reports-to-congress-in-response-to-covid-19.htm
go to Secondary Market Corporate Credit Facility for excel spreadsheet of holdings
