Hong Kong autonomy dissolved. Illinois next
May 22, 2020
–The Hang Seng index fell 5.5% as China smothers Hong Kong’s autonomy. Shanghai Comp down 1.9% as well with China deciding to forgo forward guidance related to growth targets. By contrast Kospi down 1.4% and Nikkei down less than 1%. Treasuries are seeing a bid on the day of June option expiration. TYM 139.25c settled 4 vs 139-02 and are now at breakeven with TYM trading 139-10. Last week’s high in the contract was 139-21. Ten year yield now just below 64 bps and the new 20yr is just under 111 bps, 11 below the auction yield.
–In yesterday’s note I mentioned that on Wednesday, TYN 139^ settled 1’30, just above 4% vol and said: “If we’re at the same futures level (TYU0 138-25) the straddle would be 1’22 on Tuesday at the same vol.” Well, it didn’t take long to evaporate holiday weekend time value: TYU0 settled unch’d at 138-25 and the 139^ settled 1’20 which I mark at just 3.9. Of course, with new dynamics concerning HK, treasury vol will likely find its footing.
–Yesterday the Fed’s Clarida made a speech where he highlighted the easing of financial conditions. “…we have deployed our entire toolkit…” Hmmm, does that mean it’s EMPTY now? He also emphasized that the Fed is a ‘lender’ and cannot ‘spend’, which is in the domain of Congress. “The Fed can only make loans to solvent entities with the expectation the loans will be paid back.” Not so fast Illinois. An article in the Bond Buyer reports that Illinois is “…expected to include a debt authorization allowing the state to access the Fed’s Municipal Liquidity Facility for up to $4.5 billion.” * Fed lending officer reviewing the Illinois application under his green shade as Gov Pritzker shuffles his feet on the other side of a vast mahogany desk. “I see that you’d like to borrow $4.5 billion from the Fed. However, your credit score barely registers a pulse and your unpaid bills have piled up to $14.3 billion according to your Comptroller’s report. We see that you have issued bonds previously to chip away at unpaid bills, yet they’ve continued to grow, causing your outstanding bonds to trade at junk levels. You’re technically insolvent, I am afraid I am going to have to reject this application. *Reaches for the red ink pad and rubber stamp.*
