July 13. Implied vol crushed on US interest rates; CNY makes new low
–Vol crushed in rates yesterday on heavy straddle sales. With inflation data out of the way, and auctions having been easily absorbed, all straddles on ED curve lost 1-2 bps. In addition, publication of an interview with Powell was uneventful. Sales included 5k EDU9 9812.5^ at 44.0, 7k 0EH 9700^ at 43.5, 5k 0EM 9700^ at 53.0, etc. Same in treasuries, where US August and Sept straddles each fell 10/64’s from Wed to Thursday settles: USQ 145.5^ from 1’36 to 1’26 and USU 145 from 2’50 to 2’40. Late in the day there was a buyer of well over 100k EDH9 9800c for 1.0 (EDH9 settled 9720.5). This was a short cover buy of a trade early in the year, -EDH 9800c to buy 9750/9737ps, but the open interest sheet only shows a decline of 7300 contracts, so data is sometimes suspect on prelim sheets….
–The indiscriminate vol selling may be somewhat misguided, as this morning’s news reveals a record June Chinese trade surplus. Interestingly, the yuan is at a new low this morning 6.6979, a level not seen since last August. From RTRS: “…data showing China’s trade surplus with the United States swelled to a record in June as exports grew could further inflame tensions.” USD stronger across the curve.
–Marginal new lows yesterday in 2/10, down 1 bp to 25.9 and in 5/30 to 19.5. While front end calendar spreads remain pinned to their highs (indicating high odds of a Sept hike), the flattening further back is relentless until the Fed cries uncle. EDU8/EDZ8 spread closed at its high of 20 and was 20/20.5 during Thursday’s session. Aug/Oct FF spread traded small at 21.5 and settled 21.0; this spread isolates the Sept FOMC.
–In the big picture, the flattening curve and declining yields on long dated assets spurs gains in equities as competition from FI dwindles. Earnings expected to be solid, and now appear more than adequate against 10’s that seem to have decisively turned away from the 3% level (2.85% yesterday).
–The Fed releases its semi-annual Monetary Report to Congress this morning.
