Nov 10. Curve surge on staggering volume
–Staggering day on many levels. Trump’s victory and the Republican wins in Congress are perceived to have cleared a path to fiscal infrastructure spending and related borrowing. The US ten year yield surged by 20 bps to 207. The curve steepened dramatically with 2/10 treasury spread up 17 bps to 118. 5/30 was up 11 to 140.3. New highs in all curve measures. In dollars, the red/gold pack spread rose 16.5 bps with golds down 26 ( ! ) on the day. One-year calendar spreads, which had been churning around 3/16% forever, widened to new highs. The peak one-year is now 30 bps, with several spreads having settled at that level, the nearest being March17/March18. Stocks, which initially plunged after it appeared Trump might win, soared all the way back when he DID. Copper has simply exploded to the upside, having gained 24% just this month, from around 207 at the end of October to 257 as of this writing. I would also note that oil had an outside day and closed higher; selling pressure there has been arrested.
–Record volume in many products sparked a 6% rally in CME stock to a new high. Ten year treasuries traded over 4 million contracts. 30 year auction today, which should find good demand as the yield surged 24.5 bps yesterday and some will likely use the auction to pare down on steepeners. In tens, the 50% retracement from the high yield in 2014 of 303, to the low this year post-Brexit of 136, is 219.4. As of yesterday’s futures settle that’s 12.4 bps away, approx one full point in the TYZ contract; just above the 127 strike. Yesterday there was heavy trade in TYZ 128 strike as the previous buyer of 70k at 5-7/64’s apparently took profit; settled 34 with open interest -67k. New outlier buyer of 125.5/124 ps which settled at 3/64’s, in size of 30k.
–Going forward there should be much less certainty about the Fed’s tightening trajectory. Depending on fiscal initiatives on the one hand and the threat of an isolationist drop in global trade on the other, Yellen may face (for the next 15 months until her term expires) an economy that either runs very hot or grows cold. For now, the market is voting for the former.
