Under the Counter
March 11, 2020
–There’s an old Bud Light commercial that’s pretty funny. Guy goes into the convenience store and grabs a six-pack of Bud Light but also quietly asks the Asian woman at the counter for a copy of Tongue and Cheeks. She can’t find it on the rack and yells out to another co-worker, “Hey, where do we keep Tongue and Cheeks? This guy want porno.” The co-worker, who is mopping the floor, gruffly shouts back, “Check under the counter. That’s where we keep all the really weird sh-t.” https://www.youtube.com/watch?v=xV6_7otLBRE
–Well, all I can say after reviewing the day’s action and prices is: We’re under the counter. Yields soared in treasuries and implied vols cratered. Both SPX and Nasdaq were +5%. At futures settles, 2yr +14.3 to yield 48.5 bps, 5’s +19.6 to 62.3, 10’s +27.3 to 76.8 and 30’s +31.1 to 1.25%. Hey, the thirty year is finally back above the Fed effective overnight rate! In eurodollars, all near calendars rose to new recent highs. EDH0/EDH1 is now the only negative one-year calendar at -34.25. The next one, EDM0/EDM1 closed at +1.5, and they widen from there. Red pack closed -7.375, greens -13.125, blues -17.625 and golds -21. The market expects the eases fast and hard, and the administration is floating all sorts of stimulus balloons, which is why the forward curve is steepening. BOE cut 50 bps this morning. Lagarde is pressing hard for fiscal stimulus, warning of a 2008 repeat. Stock futures have given back a large chunk of yesterday’s gains.
–The June TY atm straddle was down just over 1 point from 5’43 to 4’40 (TYM 137.5^). By the end of the day plain vanilla TY options were 5/64’s wide bid/ask with size at a fraction of ‘normal’ levels one-week ago. In back eurodollars, upside breakevens are right at the “zero-bound”. For example, EDM22 settled 99.35 and the 99.375 straddle settled 60. So upside breakeven of 99.975. As if zero really represents a cap. At one point during the day, the red March (EDH21) 9950 straddle was under 30 bps, with over a year left until expiration. It settled 32.0. EDM1 9950 straddle settled 36 vs 9951. Therefore the put is 17.5. Pretty cheap for 15 months away with a government that’s going to throw the kitchen sink at the virus.
–March midcurves expire Friday with atm straddles from 12.5 to 14.5. Ten year auction today.
