Protecting against a hike that may be moved forward
May 19, 2021
–Twenty-year auction today, followed by Fed minutes. W/i 20 yr was 2.27% late yesterday. Tens were nearly unchanged at 1.64%. The dollar was weaker yesterday with DXY ending near the low of the day at 8975. The low of the year, set in early January was 8921.
–While a lot of attention has been focused on put buying in green and blue midcurves (the 3rd and 4th year forward), there has been accumulation recently of EDM2 9962/9937 put spread in size of about 150 to 200k. Yesterday, 2.5 paid for 45k, the spread settled 2.25 vs 9977 in EDM2. These options expire at the same time as the underlying future, 390 days from now. There was also a buyer of 10k 0EZ 9950/9925 put spread for 4.0. These midcurve options expire in December of this year, with EDZ2 as the underlying contract. Put spread settled 4.0 vs 9959.5. Keep in mind that the main proponent of keeping the FF rate at zero has been Chairman Powell himself, and his term as Chair ends in February 2022. My personal bet is that he will be replaced by Brainard, who has also defended zero rates, but market forces could overwhelm the Fed by the end of the year. While the official line is that the Fed will go right through 2022 without hiking, these trades are (inexpensively) hedging for an earlier move.
–China crackdown on financial institutions dealing with crypto has pummeled bitcoin to 40k. Lumber was limit down yesterday and other commodities are paring recent gains this morning, with general weakness spilling over into stock futures. However, the longer end of the treasury curve is soft, perhaps due to the twenty-year; as of this writing, TYM is -5.5 at 132-07 and USM is -11 at 156-11.
–Three month libor set at a record low on Monday below 15 bps, with the Bloomberg Bank Funding Index (BSBY3m) following suit yesterday, setting at a new low of 0.12075.
