Rate market quiet; vol slips
April 23, 2020
–Quiet day Wednesday with rate futures erasing some of Tuesday’s moves. Yields rose, with tens +4.6 to 61.7 bps. Curve steepened with 2/10 +4.2 to 40.8. In eurodollars, reds -0.75, greens -2.5, blues -3.75 and golds -4.125, so the curve edged steeper there as well. EDM0 settled 9954, up 2.5 on the day, as three month libor presses lower (1.02 yesterday). EDM0 9950 straddle settled 18.0 as all quarterly euro$ straddles saw losses of 1-2.5 bps. For example, the red Sept (EDU21) 9975^ settled 30 from 32. Still leaves upside breakeven above 100 at negative rates, which shouldn’t be too surprising given the news feeds. Yesterday Mitch McConnell said states should be allowed to declare bankruptcy, in part to escape crushing pension liability; this after Illinois beseeched the Federal government for COVID help over and above medical costs in order to help with pensions and other expenses (like its backlog of $8 billion in unpaid bills before the crisis ever hit). The ECB said it would accept fallen angels as collateral for loans. Jobless claims are expected around 4 million, with the cumulative total over the past month wiping out all employment gains since the recovery (Reuters).
–One trade I found somewhat interesting is a buyer of ~10k TUM0 110.5c for just under 1.5 (paid 1.5 covered 110-08), futures settle 110-061. While the cash 2y note is around 20 bps, I calculate this strike to be around 6 bps and there are just 30 calendar days until expiration. Not a particularly large trade, but it simply points up demand for crash protection even as rate futures have settled into fairly tight ranges.
–WTI continues to rebound this morning with CLM0 currently up nearly $2/bbl at 15.76. On the topic of oil, CME CEO Terry Duffy gave a defense of negative pricing on CNBC yesterday. Lame. I am adding another note to discuss in further detail this morning.
