It’s all stable until it isn’t
November 11, 2020
–Ten year rose another 1.2 bps as dealers apparently got caught with more of the auction than expected, somewhat surprising given the yield back-up close to 1%. The ten year went off at 96 bps, and was 99.0/98.5 at the futures settle.
–All euro$ one-year calendars eked out new highs. For example, EDU21/EDU22 settled 14.0, up 1.5 on the day. 2/10 (using old ten-yr) made a new high at 78.5 while red/gold ED pack gained over 1 to a new high of 66.875. The curve is steepening as previous fiscal and continuing monetary stimulus are weighed against what could become a more normally functioning economy with a covid vaccine.
–There was further selling in EDM1 and EDU1 9975 puts. The latter were mostly sold at 2.0, with 66k added to open interest. Settled 1.75 vs EDU1 9978.5 for a straddle price of just 7 bps. As recently as the end of October this straddle was 11.0 and the EDM1 straddle was 9.5 (now 6.5). These are extremely low levels associated with locked Fed policy. There are 306 days until expiry for EDU1. I know what the Fed has promised, but given events over the past 300 days, these levels reflect unwavering, divine faith in the Fed. Yours.
–By the way, not that food prices have anything to do with inflation or the “real” digitally driven economy, but corn and beans are making new highs. Dec Corn was 320 in August and prints 425 this morning.
–Front March ED saw huge volume with what appeared to be one seller of near 150k contracts 9978.5 to 78. Settled 9978. These are new positions as open interest rose 90k in the contract. One client mentioned the possibility of these sales being related to a Fed credit facility winding down in March. I did not see specifics, but I would note that the Fed instituted a slew of special lending programs in March of this year, and it would not be surprising if the Fed used the one-year anniversary to pull back extraordinary measures.
https://www.federalreserve.gov/funding-credit-liquidity-and-loan-facilities.htm
Sort of makes one wonder if being short EDM1 9975 puts at 1.5 is such a sparkling trade strategy.
–The Fed released its Financial Stability Report on Monday. In it, concerns were expressed over vulnerabilities in asset prices: “Given the high level of uncertainty associated with the pandemic, assessing valuation pressures is particularly challenging, and asset prices remain vulnerable to significant declines should investor risk sentiment fall or the economic recovery weaken.” What that means in layman’s terms is, there’s a chance of more sellers than buyers. The same warning is given with respect to business debt: “Debt owed by businesses, which was already historically high relative to GDP before the pandemic, has risen sharply….”
–I saw a headline that Bill Ackman thinks credit spreads are too low and is placing bets for widening. “Hey Bill, let me get you into some of these long dated euro$ puts for incredibly low premium.” Well that would have been the simple play pre-SOFR. Now the credit feature in the product is going away.
