Negative rate insurance
May 13, 2020
–Stocks slid yesterday afternoon as LA county said the lockdown could be extended for three more months, and Druckenmiller said risk-reward for stocks is as bad as he’s ever seen. ESM fell more than 70 points to a low of 2838, extending in today’s session to 2825, but has now rebounded above 2870. CA university system said to cancel fall classes.
–Ten year auction was well-received at a yield of a mere 70 bps, even as the fed’l government reported an April deficit of $738 billion. One month! Previously that would have been a gargantuan shortfall over one year! The front end of the curve came under some selling pressure in front of Powell’s testimony today. The drop in libor has been rapid, with 3-month now at around 43 bps. With the serial May ED contract expiring Monday, there are still nearly 5 bps of convergence given a settlement of 99.6175 (38.25 bps) in EDK0. EDM0 settled 9964; there was a reasonable amount of selling in EDM0 9962^ from 9.5 to 8.0 (settled 8.5). Poor performer on the curve was EDU0 which settled -2.5 at 99.69, while longer dated contracts settled positive on the day. For example, EDU1 closed +1.0 at 9981.5, leading to a new recent low in EDU0/EDU1 of -12.5.
–A notable feature on the day was buying of EDM21 negative rate calls in front of Powell. EDM1 100.25 and 100.37 calls bought in size >20k each, settled 4.75 and 3.75. They probably thought the guy at Wimbledon was crazy for buying pandemic insurance too. This buying just before Powell, who is likely to reinforce what sev’l Fed officials have already telegraphed, namely that the Fed will avoid negative rates, seems oddly timed. But there is over a year of time value, and a lot can change in a year. If Powell doesn’t FORCEFULLY close the door on negative rates, this trade may perform.
–BBG has a headline noting that JPM thinks costs of negative rates may outweigh benefits. Another article bolsters the global nationalistic trend which augurs poorly for global trade: India’s Modi says the country must become more self-reliant.
–PPI and 30 yr auction today. At futures close yesterday w/i was 1.395/1.385
