YCC won’t hold down long end rates
June 4, 2020
–Bear steepener yesterday as stocks continue to levitate. Nasdaq (NQM) is only about 1% from Feb’s all-time-high. The Fed meets next week with the idea of Yield Curve Control gaining currency, but I am guessing there will also be discussion about asset prices surging past earnings fundamentals.
–The ten year yield rose over 8 bps to 76 bps while thirties rose 7.3 to 1.55%. New highs in 2/10 at 56.3 (up 5) and 5/30 at 117.5 (up 4). Red/gold ED pack spread gained over 5 to 48.625. For confirmation of a move/trend, I like to see implied vol increasing, heavy volume and an increase in open interest. Implied vol did increase in long treasuries, for example the atm USU straddle was 6’34 on Tuesday but jumped to 6’54 yesterday (175 strike, 10.5%). Open interest barely moved in treasuries, but the euro$ strip showed an increase of 145k. Volume not quite supporting the thesis yet, but there were some large sales in TY.
–One trade of note was a buy of EDM2/EDU2 calendar spread for 3 to 3.5 in size of >45k. Last week there was a buyer of over 50k EDM1/EDM2 spreads for 6.0 (red/green). This latter one-year spread settled 6.0 yesterday; I was a bit surprised to see someone pay over half the amount for a 3 month spread. Pay another 3.5 to extend out three months? Open interest is somewhat confusing as EDM2 was up 26k but EDU2 up 7.7k. With June midcurves having less than 2 weeks to go, maybe it was just a roll. In any case, it’s another small example of steepening.
–DXY made a new recent low yesterday, trading 97.30 late. A lower dollar eases financial conditions for the world. Trade balance today expected $49.2 billion. Jobless claims expected to be below 2 million as we’re running out of people to throw out of work. Nonfarm productivity and Unit Labor Costs as well, with the latter expected 5%. Inflationary connotation?
