Nov 6. Finally….
–Finally, the election cycle is drawing to a close. If the constant barrage of negative ads didn’t damage consumer and business confidence perhaps nothing will. I think the market has priced for a divided congress though reports yesterday circulated that Democrat control of the House was nowhere near certain. If Republicans retain both houses it’s likely negative for treasuries (inflation increase/tax cuts), but even if they don’t, it might not mean that rates decline. With the future stream of earnings discounted by higher rates, stock prices become dependent on accelerated earnings growth (increasing debt service costs are also dependent on this). If a divided congress means less in the way of pro-growth initiatives then US budget deficits will increase, i.e. more supply of debt. There’s a headline on WSJ site this morning “Where to Find Treasury Buyers? Not Asia”. This article says that Asian buyers are less eager to buy US debt.
–In any case, highlights in a generally quiet session yesterday were mainly concentrated on the downside. Buyer of 40k EDZ8 9712/9700ps for 0.75. Also a late buyer of TY2X (Week 2 options on TY which expire Friday) 117.75/117 put 1×2 for 7/64’s. Puts for this Friday are quite popular with over 400k open, the majority being in the at-the-money 118 strike with 114k. By contrast there are only 174k calls open in week-2. Apart from the election, 10’s are auctioned today and 30’s tomorrow.
–An article on Bloomberg yesterday notes risks in credit ETFs. Key thoughts are that liquidity may disappear (actually this has been a recurring theme/warning) and that credit quality in general has deteriorated. From the article “…about half the companies in the major benchmarks have credit ratings just one level above junk.” The ratings agencies were accused of being asleep at the wheel during the 2008 crisis. I would suspect increased vigilance if/when the downgrade cycle kicks in.