Paper
March 20, 2020
–One of the big catalysts sending stocks lower was the oil war announcement on the weekend preceding the March 9 open. Yesterday CLK0 settled 25.91, up 5.08 on the day and it’s building on gains this morning, as there is some chatter of a Russia/Saudi agreement to scale back production. Even Aussie$ has had a powerful bounce today, which is another market that has experienced a pervasive and violent sell off. Stocks are currently higher going into March expiration. Selling exhaustion appears to have set the stage for a generally positive day. However, one extremely negative underlying risk concerns funding pressures, on display in the euro$ curve yesterday. EDJ0, the front April ED 3-month contract, fell 16.75 bps to 99.01 or 99 bps, even with the FF target now at 0-25 bps. EDM0 settled down 11.5 at 99.35. This price action suggests that funding has gone the way of a roll of toilet paper, that is, scarce. The Fed is, of course, unrolling one program after another to make sure that funding issues are wiped away and markets don’t seize. For example, swap lines were opened to other central banks. I think the Fed will be able to contain funding pressure by whatever measures are necessary.
–There was heavy put buying for protection on the front end of the curve. For example, EDK0 9900/9850 put spread 5.0 was paid 100k covered EDM0 9834, 15 delta. This settled 4.75 vs 9935. One extreme trade was a buy of EDM0 9775 puts for 1.0, in size 18k (settled 0.5). This is a 2.25% strike based on 3 month libor in two and a half months. One area (of many) that is reflecting serious stress is the muni market. Friends involved termed this week as “historic” with a yield jump of some 300 bps. For a visual, check MUB, the largest muni etf, which has imploded from 118 earlier this month to a low of 100 yesterday. Chicago’s mayor Lori Lightfoot gave an address last night in part begging for a federal bailout. Everyone wants a federal bailout; Nikki Haley yesterday resigned from Boeing’s board because of that company’s request for a bailout. Good for her! Obviously, the deficit is going to explode, so the Treasury is now looking at selling 50 year bonds. Better hurry… Actually, it leaves the Fed as the monetization machine, and they won’t even have to pretend this time. Yes, I still have my 1922 Reichsmarks and yes, my 100 Trillion Zimbabwe notes.
