Something Brewing
January 17, 2025
******************
–There was a large 2/10 flattener printed on block yesterday morning at 9:03ET.
-52k TUH5 102-22.625
+23k UXYH5 110-175
On the chart below, it makes sense as a profit-taking exit. I’m not much of an Elliott wave analyst, but it looks like the completion of a 5th wave up. 1st from late June to early August, 3rd from mid-August to late Sept, and 5th from early Dec to now. In any case, I checked prelim open interest and sure enough, TU fell 57k contracts. However, UXY prints UP 22k. More surprising than that, TY open interest jumped 143k contracts. It’s up 222k contracts since January 13, to 4.884 million. By the way, total SOFR OI was down 97k.
–There were no huge catalysts yesterday, though Waller said 3 to 4 eases could be appropriate this year if data cooperates. Not much reaction; SFRH5/H6 was around -24.5 when he spoke, and settled -28.5, which is more like 50/50 chance of 2 more eases over that time frame. Ten -year yield fell 5 bps to 4.602%.
–In any case, the last time we had a huge surge in open interest in TY (that wasn’t related to option expiration) was last summer. On June 21 OI was 4.33m and by August 21 it was 5.45m. Of course, there was a huge price surge related to yen-carry unwind and a weak NFP of 114k on 2-Aug. The ten-year yield went from 4.16% on July 1 to the low of 3.60% in mid-Sept. We’re now 4.60%. Is there something big going on behind the curtains?
–In SOFR there’s consistent buying of SFRZ5 call spreads. On Wednesday, Z5 9650/9700cs 8.25 paid around 40k and yesterday Z5 9637.5/9687.5cs 10-10.5 for 30k. Not really huge, but I always remember just before covid hit, someone was inhaling 50 bp wide call spreads in eurodollars. For some reason I recall as EDU0 9837.5/9887.5c spreads, but I’ll have to look it up later.
–What now? Yuan devaluation? Fed stops QT and pivots to QE? Bird flu? Vol isn’t super cheap in treasuries, but I do not want to be short it. The buyer of TY 108.5 and 109c delta neutral the last couple of days (150k) is perhaps onto something!
–News today includes Housing Starts. Half-day on screens in futures on Monday for MLK Day. Inauguration.
BOJ next week:
*MAJORITY OF BOJ BOARD MEMBERS TO FAVOR JAN. RATE HIKE: NIKKEI
Bob Uecker passed. They used to make pretty good beer commercials….
