Long end yields rebound, but vol indicates the move isn’t strong
December 9, 2021
–Long end yields continued to rebound yesterday. On Dec 3 the 30 yr bond yield bottomed at 1.675% and yesterday at futures settle it was 20 bps higher at 1.874%, and that’s in front of today’s 30-yr auction. Despite the yield rise, implied vol is easing as omicron worries subside. VIX went from a high of 35 last week to 20 yesterday. New selling yesterday in TYG 128/132 strangle starting at 32; settled 29, and in TYH 128/133 ^^ at 42, settled 41. There was quite a bit of movement on the eurodollar curve with the red pack (second year forward) ultimately settling +4.125 with EDH’23 the star performer +5.0 (9877s). Everything from EDM’24 back settled down 1 to 2 on the day.
–There was an interesting article by former NY Fed chief Dudley yesterday endorsing an accelerated taper, adding that “…Fed officials are likely to signal a faster and larger tightening of monetary policy over the next three years – to an extent that markets haven’t yet anticipated.” He goes on to say he expects a median Fed forecast in 2022 of 0.8% which would “signal three 25 bp increases next year” and expects “officials to project four more hikes, taking the median target to 1.8%” in 2023. EDZ’23 settled 9829.0 or 1.71% so maybe Dudley’s not that far off. But for 2024, he expects the projected rate to reach 2.5%. That is where Bill and the market abruptly part company, as every contract behind EDZ’23 is essentially the same price and yield around 9823 or 1.77%. Options also dismissed concerns: EDZ3 9825^ was 106 on Tuesday and settled 100.5 on Wednesday.
–I think inflation is becoming as entrenched as urban violence, but it’s clear that Dudley is misreading both Powell and the market. Here’s an indication… Late Friday I paid 2.0 for 3EH 9750p ref 9842.5. Like the bond, the contract (EDH’25) has broken 20 bps and is 9822.5 as of yesterday settle. These puts, which started with a 7 delta and moved to 10 delta, are barely 2.5 bid, and settled 2.5. Right race, wrong horse, or something like that. I’m on board with the scenario of much higher rates in the long end that the market expects. But the market is telling me and Dudley that it’s not buying into the 2.5% FF story.
–The Fed’s Z.1 for Q3 comes out today. The press focuses on household net worth, which I am sure took a nice jump based on real estate. SPX was 4297 on June 30 and 4307 on Sept 30, so not much there. I tend to look at changes in debt levels, and it’s likely the case that the rate of growth in debt across the board have decelerated.
–China’s Evergrande and Kaisa were downgraded to default, but the head of China’s central bank, Yi Gang, says the problems can be smoothed over (WSJ).
–An earthquake swarm in Oregon has the attention of the press. Here’s a link to the US Geological Survey that updates quakes:
https://earthquake.usgs.gov/earthquakes/map/?extent=10.66061,-154.07227&extent=63.70472,-49.04
