Uncharted waters
March 3, 2022
–Monster reversal of Tuesday’s rally in interest rate futures. The red pack (2nd year forward) fell 27 bps. FFF3 (January FF) fell 30 bps! to 9846.0 or 1.54%, right back to a forecast of 5 or 6 hikes of 25 bps each by year-end, although Powell allowed the possibility of 50 at any given meeting. The rise in oil and other commodities is underscoring inflationary concerns. Late yesterday CLJ2 was 111.31, up $7.90 on the day. This morning it’s 113.20. May Wheat was around $8/bushel in mid-Feb, which was a relatively high price. This morning it is over $11, a rise of 37% in two weeks. Food security will become a hot topic.
–In treasuries, there’s an amazing bid for calls (thanks RK). TYM2 settled 127-09. Equidistant TYJ2 129.25c/127.25p risk rev (combo) settled 9 to the call 24 vs 15. TYJ 129.75c. 2.5 points out of the money settled 20, while 125.5p, 1.75 out of the money, settled 19. Demand continues for the 130c strike, yesterday a new buyer of 50k week-2 130c which settled 11 (paid 15) and expire 11-March. Liquidity across markets is quickly receding.
–FV vol is hugely expensive relative to US vol. For example, FVM settled 118-045. FVJ2 117.5p settled 22, delta -0.33, ~12 bps out of the money. USM2 settled 156-16. USJ 155.5p settled 1’26, delta -0.40, ~5 bps out of the money. Proper ratio is about 3.75 FV to 1 US. THIS IS NOT A RECOMMENDATION, but if you’re looking to put on a synthetic 5/30 steepener, the invitation is dangling in front of you. Caveat of course, is that sometimes the stuff is here for a reason! Typically a 4×1 FV to US put spread will trade fairly close to flat when they are approx equidistant in terms of bps out-of-the-money.
–Attached chart is 10 yr breakeven, which is testing last year’s November high of 277 bps, ending today at 275. Though this particular measure of long-term inflation expectations hasn’t been particularly valuable, it’s another indication that using the phrase “anchored” with respect to expectations should now join our old friend “transitory”.
–EDH2/EDM3 blasted out to 49.5, up 18.25 on the day, as the March FOMC is now cemented at 25 bps, but hikes expected at subsequent May 4 and June 15 meetings. After March, there are 6 more FOMC meetings in 2022. Of note in ED options was a buy of 50k 0EZ 9550/9500ps for 1.5. EDZ3 settled 9785, so this is 235 out of the money, and expires on 16-Dec 2022. Put this in the anything-can-happen bucket.
