Risk on
July 22, 2021
–Much of Monday’s extreme yield plunge and flattening reversed yesterday with the 10y yield up just over 6 bps to 1.28%. Red/gold euro$ pack spread rose over 6 bps to 1.04625. Downside in Eurodollar options dominated. Example, buyer added to 3EZ 9837.5 puts from 11 to 12 with EDZ4 trading down to 9871 (80k in two days, settled 10.5 vs 9872 in EDZ4). Also a buyer of 25k 3EZ 9812.5p/ 9925c risk rev for 2.0. Settled 2.5 for put. In treasury options, +10k TYU 133.5/132.5/131.5p fly for 9/64. Settled 9 vs 134-03+. There were more, but these represent shorts on longer maturities.
–Rumors about China property developer Evergrande swirled in the morning and are now on every news outlet as both its stock and bond prices have plunged. Total debt said to be greater than $200 billion, with ramifications on China’s broader property market. If it was the US, the financial authorities would make the maternalistic decision to inject more liquidity into the system to save the company and make sure that property investors don’t suffer any type of a drawdown. China may take a more capitalistic approach as they have tried to tamp down on excessive speculation.
–There are also articles about Powell having widespread political support within Biden’s team for a new term.
–Yesterday was risk-on in stocks and crypto, with stock index futures continuing to press higher, more than erasing the sharp drop from Friday-Monday. Covid variants may mean a return to masks, and that means more monetary accommodation. ECB this morning, already having articulated “forceful or persistent” support for the economy.
