Modest FI unwind
October 27, 2020
–A pullback in stocks proved enough to spark short covering in fixed income, along with exits of long curve trades. Open interest declined in FV, TY and US. DJIA -2.3%, SPX -1.9% and Nasdaq -1.6%. Tens fell 3.9 bps to 80.1. 2/10 eased 3.3 to 65.4. Trading in rate futures/options was light. However, there was buying of about 10k EDZ1 100c for 3.0 (settled 2.75 vs 9977). And a buyer of 10k 3EH 9937/9912/9900 put tree for 4.5 (settled 4.25 vs 9946.5). Lower vol in treasuries, as the seller of TYF 136.5/139.5 strangle added another 16k to his sort, this time at 40 vs 44 last week. It settled 40. So ten year vol slips a couple of tenths, even as VIX firms and holds above 32, highest since early Sept.
–Today’s news includes Durables expected +0.5, with Capital Goods Orders Non-def ex-air at +0.5 from +1.9. Consumer Confidence expected 102 from 101.8. Treasury kicks off auctions with $54 billion in twos, followed by similar amounts of fives and sevens on Wed and Thursday. Thursday also features post-close earnings reports from tech giants AMZN, AAPL, GOOGL and FB.
–Interesting comment from BBG’s Tracy Alloway this morning regarding compressed spreads on corporate debt courtesy of the Fed’s actions and jawboning: “As analysts at JPMorgan Chase point out, the interest rate sensitivity of the investment-grade market has jumped 56% since March 23, and is now at a record high of $7 billion per basis point, meaning prices could shift by $7 billion for every one basis point move in yield. No one expects a sharp jump in interest rates any time soon, but the fact that the Fed has increased the market’s sensitivity to interest rates while making bond ETFs even bigger means the central bank has sown the seeds of a potential future dislocation in its efforts to fix the current one.” Imagine a contested election which results in divided power and further delays/dilutes fiscal stimulus plans, shifting the burden right back to the Fed…
