May 9. Possible auction drama
–Trump exits the Iran deal, oil jumps $2/bbl to new highs, and stocks rally. Hmmm. Today brings the ten year note auction against a backdrop of heightened inflation concerns, in which oil plays a major role. Today’s PPI is expected +0.3 with Core +0.2. Tomorrow’s CPI is expected to print +2.2% yoy Core. With tens just above the relatively juicy yield of 3%, there should be decent demand. However, there’s a chance that increased supply will be overwhelming, and if there’s a continued pullback of foreign buying (low indirects) it could be quite negative going into tomorrow’s 30 yr.
–Big new trades yesterday, +60k TYM 118p 3. That strike represents around 3.15% yield. EDH9 9687p 2.0 for 100k vs 9720.5 to 22. Put settled 1.75 vs 9723 with open interest +65k. With a June hike priced into the FF market, and EDM8 hugging the 9762 strike, the EDH9 puts look like a simple play for continued hikes at every quarterly meeting going into the beginning of next year, with the possibility of an off quarterly hike thrown in. One other trade of note was a seller of EDU8 9750 straddle vs 9762c which was sold at 10.5 in about 40k.
–Implied vol firmed slightly but is still remarkably low given the chance of an inflation ‘breakout’. While TYM 118p seem far away, anyone needing downside protection would probably want to get it in place prior to the auction.
