t-t-t-t-taper
May 20, 2021
–Yields pushed higher after Fed minutes showed that some members wanted to accelerate the taper discussion. Tens rose 4.3 bps to 1.683%, while blue eurodollars (4th year forward) were the weakest on the strip, with the pack down 5.875. Interesting note on ZH about participation in the Fed’s Reverse Repo facility, quoting Zoltan Pozar: “use of the facility has never been this high outside of quarter end turns, and the fact that the use of the facility is this high on a sunny day mid-quarter means that banks don’t have the balance sheet to warehouse any more reserves at current spread levels.” In other words, the Fed’s QE of $80 billion treasuries per month (and $40b MBS) has stuffed banks ever more full of reserves, leaving SOFR at 1 bp and risking a move to negative rates as banks lend forced-fed reserves overnight at almost any rate. An adjustment higher in IOER appears imminent, but that, along with taper discussion has the potential to signal a change in policy. Then we’ll see if Dudley is right about the inevitability of a tantrum.https://www.zerohedge.com/markets/fed-alert-overnight-reverse-repo-usage-soars-above-covid-crisis-highs
–Large trades yesterday included a sale of over 40k EDM3/U3 calendar spread at 22, which marks the cessation of libor at the end of June 2023. Prior to the late November announcement on libor, this calendar was trading around 4bps, but immediately shot up to the high teens and then over 25 on the prospect of contracts following June’23 being adjusted to SOFR with a spread. Trades were mostly at 22, though spread settlement yesterday was 23. For the sake of comparison, EDH3/M3 settled 14 and EDU3/Z2 settled 16.
–A couple of front one-year eurodollar calendars made new recent highs: Sept 21/Sept 22 rose 1 to 15.0 and Dec 21/Dec 22 rose 1.5 to 22.0. The latter spread at under 1/4% still seems low to me, though the recent low is 14. Post-minutes there was a vol seller of 7k 2EU 9912 straddle at 31.5 to 31.0; settled there with underlying EDU23 exactly on strike at 9912.5.
–Stocks starting off on the back foot today. Any modifications to an unending torrent of liquidity threatens current valuations, with a gentle reminder coming from what are lovingly referred to as digital assets.
