Oct 9. Rotation? Or just a spiral down?
–In another sign of global fragility, Pakistan has asked the IMF for assistance, just as the latter institution downgraded its global growth assessment (following Lagarde’s warnings last week). Italy’s budget truculence continues to spill into markets, where the 10 yr btp is now 3.68%, adding to further pressure on Italian banks.
–Stocks took a tumble yesterday and are lower this morning, though still above Monday’s lows. In spite of weakness in stocks, USZ and WNZ (30-yr and Ultra bond contracts) were still lower Monday throughout the session, and the selling, and/or lack of bids, in front of this week’s auctions, continues. A headline on the WSJ website this morning: ‘Bond Market Freaking Out? It May Spark a Healthy Rotation’. Yeah. Or it may create a Spiraling Vortex that Wreaks Havoc on everything in its Path. Thanks WSJ.
–Consider these prices late yesterday, USZ was 137-07 and the 22 delta Dec 134 put (3-07 away) was 36/37 while the 24 delta 140 call (2-25 away) was 33/34. Bid to puts. In dollars, the bid is to calls. For example, 3EZ 9650/9700 risk reversal covered 9675 is flat bid for the call (43d). If there’s a flight to quality spark, it probably will be in contracts in front of blues. Although the eurodollar curve edged flatter yesterday, weakness on the long end of the treasury curve is going to have to show up eventually in the back end of the dollar curve.
–Pretty quiet overall yesterday but we did notice a large (exit) seller of jan FF at 9761/60.5 in 30k. 9761 is 2.39% against a current Fed effective of 2.18%, so 21 bps priced for the Dec FOMC (where there’s still a possibility that IEOR only rises by 20). It’s a time when position adjustments, which have the potential to turn into forced adjustments, can dominate trade activity.
