Wild Monday. Pandemic Plays Pared.
November 10, 2020
A covid ‘breakthrough’ vaccine announced by Pfizer sent stocks on a giddy morning run to new highs and caused bond yields to surge. However, mammoth rotation ensued across markets, as covid plays were pared back in favor of more normal conditions. The most dramatic move was the surge and then plunge of Nasdaq, which finished -1.5% on the day as DJIA ended up nearly 3%. Outside day for Nasdaq. Zoom and NFLX were crushed, -17% and -8.6%. FB and AMZN both dropped 5%, MSFT -2.4%, AAPL -2% and GOOGL was essentially unch’d. GE a tarnished previous bellwether of the Dow, gained 7.8%.
–The ten year yield exploded to 95.6 bps, up 13.8 bps on the day and the 30y ended at 1.748%, up 15. While tens remain below the psychological 1% level, all measures of the curve made new highs for the year. 2/10 up 11 to 77.5. 5/30 up 6.4 to 130. Red/gold euro$ pack spread up 13 bps to 65.75. However, implied vol was blanketed, starting with a sale of 50k TYZ 137.5 put at 10 covered 137-30, 33d. That strike is part of the large TYZ 139/138/137.5 put tree, so it appears shorts were added to the lower leg. This tree was originally bought for 3 to 5, and settled 38 (1’28, 0’36, 0’18) vs TYZ 137-18+. Another interesting feature is the change in the vol curve across treasuries. FV vol was higher on the day, with a noted buy of 20k FVF 126c 3.5 to 4.5 (5.0s vs 125-08.75) while 30y vol was unch’d to lower. It was after the Covid onset in March that 30 yr vol outpaced everything else, as the long end of the curve is most affected by stimulus while the Fed promised to keep rates at zero. This trust in the Fed was punctuated by huge sales in near puts yesterday, for example some 50k EDU1 9975p were sold mostly at 2.5, settled 2.25 vs 9978, yielding a straddle settle of 7.5 vs Friday’s settle of 10, with 308 days to go! For another example, 0EU 9962.5 straddle settled 13 vs 15 on Friday. 305 days to go here, with EDU’22 as underlying.
–To give a sense of just how depressed these front straddles are, I checked back to May 12, when the last red midcurve had 304 days until expiry. It was 0EH2, based on underlying EDH’22 which had settled 9980. At that time the straddle was 30. VERSUS 13 NOW! Of course, at that time the idea of negative rates were still in play. Currently, the Blue Sept 3EU 9925 straddle is just 36, a large nominal premium spread to the 0EU of course, but still below the May 12 level for the last blue of 44 (vs 9949.5).
–The curve is now steeper than it was mid-year, and every one-year euro$ calendar settled at a new high. There was a seller of 30k EDM2/EDM3 spreads at 13, settled 12.5, appears to be a new position. Ten year auction today. Monday’s volume was huge, but liquidity is lessening as many hedge funds pare back risk to protect gains made earlier in the year.
