Gold reflates. Interest rate vol, not so much
Nov 6, 2020
–Short end yields edged slightly higher and longer maturities were unch’d to a shade lower on Friday, as SPX (+1.95%) and Nasdaq (+2.6%) surged within shouting distance of new all-time highs. Gold GCZ0 jumped by $50/oz to 1947. Nov bitcoin exploded 1060 (about half an ounce of gold) to end at 15260; it prints 15740 this morning. DXY looks vulnerable to downside breakout.
–Tens ended unch at a yield of 76.8 bps, while TYZ rose a few 32’s to 138-28. The implied vol puke continued as the economic growth and reflation theme reversed. Treasury vol is nearing all time lows, as pre-election protection has been wholesale dumped. I marked Jan US bond vol at 8.3, having been 11.4 at the start of the month. In the eurodollars there was heavy liquidation of blue March 3EH puts. As an example, 3EH 9937p, the most popular long strike for put spreads, lost 40k in open interest yesterday; settled 5.0 vs 9952 in EDH4.
–2EU 9962 straddle settled at just 22.0 bps with 309 days until expiration. Underlying contract is EDU’23 at 9960. This price is forecasting utter lethargy in rates over the next few years. Of course, Powell is promising the Fed will continue to support everything, for now keeping the current pace of treasury and MBS purchases, but eager to jack it up. Worth noting that the operational statement instructing the desk also adds: “Increase holdings of Treasury securities and agency MBS by additional amounts and purchase agency commercial mortgage-backed securities (CMBS) as needed to sustain smooth functioning of markets for these securities.” I.e., do whatever is necessary.
–Employment report today with NFP expected 600k, but the risk appears to be a much lower number.
–There were a few large trades worth mention. Buyer of 25k FVF1 126.25/126.5/126.75 call butterfly for 3.5. This settled 3.5 vs 126-0425 in FVH. DV01 in FVH is about $57; the mid strike in the fly equates to 26.5 to 27 bp five year yield vs current 32.9.
–In eurodollars, there was buying of about 60k EDZ1/EDH2 calendar spread for 3.5 up to 5.0. Big discrepency compared to 3m spreads right around it: EDU1/Z1 settled 2.5, H2/M2 at 0.5 and M2/U2 at 1.0. EDZ1/H2 settled +5.0, up 2 on the day with those two ED contracts showing the most volume of any contracts, 252k and 340k. Prelim OI figures are probably incorrect as they show little change +19k and -5k. They’ve got the same guys that are counting the ballots. This play is certainly related to the libor to SOFR transition. Dec ‘turn of year’ pressure has been flipped on its head.
