Hic sunt dracones
August 21, 2020
— Sept Treasury option expiration today. Ten year yield declined 3.1 bps to 64.3 and 2/10 also fell 3 as twos were unch’d, to 50.4.
–Today’s news includes Markit Mfg PMI expected 52.0 and Services 51.0, which would both be slight improvements over last month’s data, but Europe PMIs came out on the soft side. Existing Home sales expected 5.4 million vs 4.72 million last. Sept Lumber, which was 300 in late April settled 801.90 yesterday, a new high. Interestingly, copper, which broke out above $3.00 on Wednesday, has now reversed lower. It now looks as though that move was false.
–Powell to give speech on ‘Monetary Policy Framework Review’ on Thursday August 27. (Virtual Jackson Hole Conference). The Fed minutes brushed back expectations of Yield Curve Control, but the new framework will likely encompass the idea of allowing past inflation shortfalls to be made up. I don’t want to run this analogy too hard, but all I will say is that sometimes changing the rules to make up for past injustices gets out of hand.
–Ten year vol eased slightly but Dec bond vol remains quite well bid with USZ straddle settling 6’62 or 9.8%. That’s 5.5 times the implied vol on FVZ even though the DV01 ratio between contracts is just 3.9. The situation of bond vol being extremely strong relative to the curve has been persistent this year. My interpretation is that the front end of the market, even extending past 5 yrs, has completely embraced the spirit of YCC. The long end is like maps in the dark ages, where oceans past known shorelines were simply labeled “Here be dragons”. I don’t know if those dragons mean fire-breathing inflation or a giant tails whipping around credit risks. I just respect the fact that they’re out there lurking around in year 2020.
