Send in the Guard!
October 20, 2021
–The curve rebounded somewhat from the hard flattening over the past couple of days. Five year yield fell 0.5 bp to 1.155% while the thirty year rose nearly 7 to 2.087% in front of today’s 20 yr auction. The red/gold pack spread (2nd to 5th year) jumped 8.75 to 96.375, sharply snapping back from Monday’s close of 87.625, which is the flattest the spread had been since the very start of 2021. The red pack (2nd year) was up 4 bps in price, while the gold pack (5th year) was down 4.75. By the end of the electronic session, EDU’24 (green Sept) was up 0.5 while EDU’26 (gold Sept) was down 8. That is to say, it was really the forward back-end contracts which displayed the most weakness. I’m not sure if that continues, but keep an eye on gold midcurve puts. I feel as though there’s about a 20% chance that the bottom falls out of the back end of the curve; owning puts on golds is a limited risk way to express that view.
–Implied vol eased in FV and TY but was stubbornly bid in US, another factor which argues for the idea of long end weakness.
–Reuters reports that “China will curb excessive financing through debt issuance to build high leverages, the Chairman of China’s securities regulator, Yi Huiman, said on Wednesday.” It’s pretty clear that China’s recent moves will further impede growth. As a contrast, it’s reported that the US administration is pondering deploying the National Guard to address supply chain issues. Note to the Fed: that’s when you realize that inflation issues are NOT transitory. Note to everyone else: Time to panic.
