Low MOVE underpricing uncertainty
December 8, 2024 – Weekly comment
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Image below is MOVE (treasury vol index) and the yield of the US 10 year. The ten-year yield bottom corresponded with the September 18 FOMC 50 bp rate cut. That yield was 3.62% on September 16, the low for this calendar year. Rates soared from there going into the election, with Druckenmiller, Paul Tudor Jones and others warning about government bond supply associated with unsustainable deficit spending. The MOVE index firmed to the high of this calendar year (136 on Nov 4) on the back of put buying. Since the election, MOVE index has collapsed to 83.2, near the low of the year. The 10y yield has pulled back from 4.45% to 4.15%.
Friday’s employment report was a case in point. On Monday TYH5 settled 111-03+. TYH5 111 straddle settled 2’43. TYH5 110p settled 0’55 and the 112c at 0’60. On Friday TYH5 settled 111-145 and March 111.5^ at 2’29. On Friday, the 110p settled 0’41, down 14/64s from Monday’s price, and 112c 0’62, up 2/64s. Thursday to Friday change in 112c was just 3/64, half the move the delta would have indicated. Obviously the play was to be short puts.
There had been a buyer of 25k TY wk2 112c on Thursday for 10. Settled 8 on Friday despite the rally (futures +8.5/32s).
As a friend likes to say “How ya left?”
A few observations. First, the debt situation is not over, however my bias tilts toward a strong chance that the new administration is going to be successful in bending the spending trajectory lower. Vol has been taken down to levels that are a much better buy than sale. From here, I would prefer being long puts on long-dated treasuries. VIX at 12.77 Friday is lowest since July. Also a better buy than sale, though the VIX futures curve reflects that sentiment. Dec settled 14.28. Jan 15.95 and Feb 16.75.
After Waller said on Monday his lean was still for a December ease, and Powell stuck to middle-of- the-road comments on Wednesday, Friday’s increase of the unemployment rate to 4.2% was enough to solidify market expectations of a 25 bp cut at the Dec 18 FOMC. FFZ4 settled 9551.0, close to what should be the final settle on a cut ( 9552.5). If there’s a cut, EFFR will move down to 4.33% against CPI of 2.6 (with 2.7% expected Wednesday). Not sure where neutral is, but in this environment a real rate of 1.6 to 1.7% doesn’t seem particularly restrictive; probably not much room or urgency to cut much further unless employment and inflation data begin to crater.
Of course, global political upheaval could easily crush confidence. Currently SFRM5 settled 9609.5 or 3.905%. Option pricing shows that fear is still to the upside, as further otm calls trade at higher premiums than puts. The experience post-SVB hammered home the risk of being naked short otm calls.
SFRM5 9609.5
M5 9650c 14.0s delta= +29
M5 9575p 9.5s delta = -27
M5 9700c 7.25s delta = +15
M5 9525p 2.25s delta = -8
This week’s central bank meetings include: RBA on Monday (nothing expected) BOC on Wednesday (leaning 50) and SNB, ECB on Thursday (cut of 25 to 50). FOMC is on the 18th (25 expected) and BOJ on the 18th (small hike).
ERZ4/ERH5 3 month calendar settled -66 bps Monday (9718.5/9784.5) but popped up to -58.5 by the end of the week (9717/9775.5). A three-month calendar sub-50 is, of course, an indication of aggressive near term ease expectations.
OTHER THOUGHTS
Rapid collapse of Syria and even the United Healthcare CEO murder underline security concerns across various levels. Lotto ticket buy for rapid deterioration in global conditions: FVG5 111c settled 1.5/64s.
Treasury auctions this week:
TUES 3y, $58b
WED 10y, $39b
THUR 30y $22b
| 11/29/2024 | 12/6/2024 | chg | ||
| UST 2Y | 417.0 | 409.4 | -7.6 | |
| UST 5Y | 407.3 | 403.2 | -4.1 | |
| UST 10Y | 419.2 | 414.9 | -4.3 | wi 414.9 |
| UST 30Y | 437.8 | 433.0 | -4.8 | wi 432.9 |
| GERM 2Y | 195.7 | 200.0 | 4.3 | |
| GERM 10Y | 209.5 | 210.8 | 1.3 | |
| JPN 20Y | 185.2 | 185.9 | 0.7 | |
| CHINA 10Y | 203.3 | 195.2 | -8.1 | |
| SOFR H5/H6 | -49.0 | -44.5 | 4.5 | |
| SOFR H6/H7 | -10.5 | -6.5 | 4.0 | |
| SOFR H7/H8 | -2.0 | -2.5 | -0.5 | |
| EUR | 105.82 | 105.69 | -0.13 | |
| CRUDE (CLF5) | 68.00 | 67.20 | -0.80 | |
| SPX | 6032.38 | 6090.27 | 57.89 | 1.0% |
| VIX | 13.51 | 12.77 | -0.74 | |
| MOVE | 97.74 | 83.20 | -14.54 | |
