The market is demanding an ease NOW.
Oct 4, 2019
–Service ISM came out at 52.5, the weakest since Q3 2016, confirming the Mfg ISM flop. Recall that July 2016 was the all-time low 10y yield at 1.365. Yesterday’s close was 17 bps away at 1.529% (-6.3 on the day). The curve steepened, but interestingly, implied vol eased, perhaps partially in sympathy to a lower VIX as stocks stabilized. (VIX at 19.4 late vs 20.56 Wednesday). New recent highs in most curve measures. 2/10 up 3.5 bps to 14.7. 5/30 up 4.2 to 69.5. Reds led the euro$ strip +10.125. Reds to deferred made new highs with red/gold pack spread up 4.125 to 21.5. The curve has steepened as the MARKET decides that the Fed will be easing in October. Oct/Nov FF spread has plunged this week from -9.25 bps to -20.75, now indicating better than 80% odds of an ease at the Oct 30 FOMC. Jan20 FF contract closed +5.5 bps at 98.565, a spread of -41.25 to FFV9.
–There are lots of large euro$ call structures going through targeting MUCH lower rates. As just one example, EDG0 9875/9912.5/9950 call fly was bought 10k for 4.25. Looking for FF target of 0.75 to 1.0%. There continues to be buying of EDZ9 9825/9837/9850c fly for 1.5 (around 50k). As was noted by Monday Morning Macro (see chart below), since mid-Sept, EDZ9 has rallied 27 bps and open interest has shed 250k contracts, falling another 28k yesterday. Classic short squeeze.
–It’s not just the short end that sees lower rates in the (near) future; there was a buyer of 25k TYX 134/135 call spreads for 5/64’s. Corresponding with the all-time low yield of 1.36 in tens, TY1 traded 134-07+ on July 6, 2016. Hard to imagine that call spread filling out, but who knows what today brings! Only three weeks left for Nov option expiry (but this was probably just a hedge for a weak employment report).
–NFP expected 140-145k. Gains in treasuries from here should be hard to come by, but stocks again point to a lower open as does copper. Regardless of cheerleading efforts for the US economy, the global picture remains shaky, and we’re back to an element of weekend risk.
Interesting quote:
“We are being told today that there is no inflation, but if you take a basket of the 72 most bought items at Walmart, the price of that basket is up 4,8% year on year.”
https://themarket.ch/interview/gave-the-bond-market-is-the-biggest-bubble-of-our-lifetime-ld.945
