Virtual reality
March 27, 2020
–Jobless claims hit 3.28 million, but stocks soared with SPX +6.24%. In a way, the first sentence says it all: the Fed can provide unlimited paper liquidity to generate the illusion of financial healing, but the real physical and economic world will take time, and jobless claims signify the pain and changes to come. That’s why they call it VIRTUAL reality. The Fed’s balance sheet has ballooned over $5T, no surprise there, and the dollar index finally took notice, having dropped from a high of nearly 103 early in the week to below 99.5 yesterday. As mentioned during the day, CDS had been sold on Wednesday (thanks WHM), treasury vol has consistently fallen (though it firmed a bit yesterday). And while yesterday’s 3m libor setting surged over 10 bps to 1.37%, the 1, 6 and 12 month settings were all lower by about 1 bp. Forward proxies for libor/ois are compressing somewhat. For example, while FFQ0 to EDM0 remains elevated at 51.5 bps, the FFV0 to EDU0 spread settled at 31.5, down 1.5 on the day. Demand for dollar liquidity will slowly be satisfied. Stocks, which are a bit lower this morning, should find support. However, it’s worth keeping an eye on REAL commodities. For example, WTI crude slid yesterday with CLK0 -1.89 to 22.60. Production cuts and slow work-off of bloated inventories will take time.
–Ten year yield fell 3.5 bps to 81. Curve was mixed without much of a net change. April treasury options expire today.
–Consider pricing on ED December straddles, all of which expire 11-Dec 2020. EDZ0 9962.5^ 23.0s vs 9964.5 (actually settles Monday 14-Dec). 0EZ 9962.5^ at 29.0 vs 9964.0, 2EZ 9950^ 40.0 vs 9946.0, and 3EZ 9937.5^ 54.5 vs 9932.5. Pretty steep premium curve? Actually, the upside straddle breakevens are all below the 100, zero-bound, with the midcurves between 9990 and 9992. But consider the downside. Is it difficult to imagine that in Dec 2021, for which 0EZ prices, that rates could somewhat ‘normalize’ to over 1% given gargantuan stimulus and liquidity? Will look for ideas today…
–Chicago is closing the lakefront, its crown jewel where people can escape the grit of urban confinement. You CAN still go to the beach, keep social distance and look good doing it:
