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May 28, 2020

–My opinion is that increased gov’t control saps economic dynamism.  Continued efforts to bring Hong Kong into the ‘one country, one system’ umbrella were punctuated by Pompeo’s declaration that HK has lost its autonomy, which will surely have negative economic consequences.  I think the same is true in the monetary realm, but the Fed trotted out NY’s Williams to say yield curve control is being seriously considered. “Yield curve control, which has now been used in a few other countries, is, I think, a tool that could complement, potentially complement, forward guidance and our other policy actions” said Willaims.   Treasury vol has already been smothered in the past couple of weeks and held firm at low levels yesterday.  Euro$ vol edged lower.  As examples, on Friday 0EU 9975 straddle settled 14.5, down to 12.5 yesterday.  2EU 9975^ went from 18.5 to 17.5.  YCC goes in the same basket with negative rates.  Bad idea.  Rather than ‘creative destruction’ it leads to ‘uncreative status quo’.  The US thrives on economic change and growth.  Now it’s threatened by COVID and another potential outbreak, this one being social unrest sparked by the death of George Floyd while being restrained by Minneapolis police.  That city is now seeing violent protests which seem to be spreading to other metro areas, possibly exacerbated by the tinderbox of lockdown stress.   I know it’s a poor analogy, but I just don’t think it’s a good idea to lock down rates at a time of extraordinary fiscal stimulus.  By the way, Japan authorized $1.1 trillion in new stimulus.

–Back to the markets…  Beige book was unsurprisingly downbeat.  Today brings Durable Goods Orders, 2nd revision to Q1 GDP expected -4.8%, and Jobless Claims expected at another 2 million.  Treasury auctions 7’s which were 53 bps yesterday.  Net changes in rates were modest, eurodollar curve from +1.5 to -1.5 on the day.  Thirty-year made a push for higher yield early, but came back to end nearly unch’d at 1.431%.  5/30 is knocking on the door for new highs at 1.088.  One large trade supporting the steepener theme was a buyer of 75k EDM21/EDM22 one-year calendar for 6-6.5.  Settled 6.5; open interest in the two contracts rose 59k and 53k.  EDH21/EDH22, the one-year spread just before the one bought settled at 1.0, so there’s a small negative roll. 

Great story to restore a little faith:
https://www.espn.com/espn/story/_/id/29195851/from-homeless-refugee-chess-prodigy-9-year-old-dreams-becoming-youngest-grandmaster

From homeless refugee to chess prodigy, 9-year-old dreams of becoming youngest grandmasterIT’S 9 P.M., and 8-year-old Tani Adewumi is wired, like he’d just swallowed a bag of sugar. He had played chess all day, but he wanted to play more, at least until midnight. The first day of the …www.espn.com

    It appeared to be a blunder, but Tani knew exactly what he was doing. He remembered studying a 19th-century chess game played by the legendary Paul Morphy, and he knew if he could bait his opponent into taking his bishop, he could win the game.

Here’s a kid studying chess games from the 1850s, while the rest of the world repeats the same errors!

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.

  The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.