- Selling pressure overwhelming QEII
- Daily trends strengthen to the down side.
- Call structure buying in Mar. 10yr. options continues however a move towards 2.5% is on hold. ***
- Our pigs (states) are running into serious difficulties as the rout in munis adding to rate pressures in long term treasuries.
*** Re call structure buying contacts have indicated some of this may be forced hedges to protect insurance companies and others that have commitments such as annuities and so forth. A move towards a 2.5% yield on benchmark 10yr. notes (currently around a price of 12715 on Dec. 10yr. futures), would cause them losses on future commitments.
No doubt some are still trading speculatively as I advocated yesterday that 2.5% on benchmark 10’s remains the target. However such a move is not materializing. Rather daily and weekly trends on 10yr. futures are firmly down and prices look to head lower for now. QEII looks to be failing and I must reassess.
Problems that the US has been able to avoid through QE 1 are now coming home to roost similar to the problems re-emerging in the Piigs in Europe. Our municipal bond market which is $2.8 trln. in size “could form the future nexus of systemic financial risk”, according to an article in today’s financial times. The article concludes by saying $1 trln of this market is owned by individual investors and if the possibility of default becomes more imminent there could be a major rout in that market. Already this week that market experienced one of the largest one day increase in yields since the height of the financial crisis. If a full blown crisis were to occur perhaps money would head towards treasuries in a flight to safety, but what seems to be happening now is the selling is wide spread and the only buyer is the Fed and $600 bln. probably will not be enough.
A colleague noted yesterday that mortgage applications dropped by the most this year as an increase in borrowing costs last week caused refinancing to drop 17%. 30yr. mortgage rates had risen by 18 basis points. It seems the Fed has a real dilemma on it’s hands and will have to buy a lot more debt moving forward. This is getting very problematic as newly elected fiscal conservatives want to do away with stimulus programs - such as the 35% subsidy the federal government gave to the Build America Bond program which accounted for 25% of new muni bond issuance this year.
Larger flows from a.m. session posted below:
| 11/18/2010 | |||||
| Paper | B | 2,000 | EDZ2 88/90 c spread | 2 | N/A |
| Paper | S | 2,000 | EDU93 strad 39 to 38 | 39 to 38 | N/A |
| New Edge | S | 4K X 8K | EOZ 92/93 c 1X4 legs over | 0.5 | N/A |
| Drax | B | 2,000 | EDM3 9975c | 63 and 64 | N/A |
| TJM | S | 5,000 | EDZ95/96/97 c fly | 4.5 | N/A |
| Paper | S | 5,000 | EDM95/97 c spread vs. 87 p | 7.5 cspred | ^9848 50% |
| Paper | B | 3,000 | EOM 91/95 c spread | 12.5 | ^9892.5 30% |
| TJM | B | 4,000 | EDZ2 87/90 c 1X2 | 3.5 | 9857/57.5 |
| Paper | B | 5,000 | EOF88/91 pspred | 7.5 | N/A |
| Fed Fund | |||||
| Dowd Wesc. | B | 3,000 | FFK87/93 c 1X2 | 0.5 | N/A |
| Mann | B | 500 | FFJ9975/9981 p 1X2 | even for 81 p | N/A |
| Mann | S | 2,000 | FFU/FFM 9987 c calendar sell M | even | N/A |
| Fortis | B | 1,500 | FFM9987c | 0.75 | N/A |
| New Edge | B | 1,000 | FFZ 9981/9987 c spread | 1.25 | N/A |
| Mann | B | 1,000 | FFK9987c | 0.75 | N/A |
| Spread | |||||
| Screen | B/S | 20,000 | EDZ1/EDH2 futures spreads | 15 to 13.5 | |
| Block trade | |||||
| 5yr. | B/S | 9,843 | FVZ posted 9:34 a.m.c.s.t. | 11931.5 | |
| 10yr. | |||||
| CCM | S | 600 | TYH123.5 strad | 3.41 to 3.40 | 12415.5/16 |
| TJM | S | 500 | TYZ124.5c | 0.32 | ^100%12414.5 |
| Swiss B | S | 1,000 | TYH120.5/122/1223.5 p fly | 0.11 | 12415/15.5 |
| Fuji | B | 3,000 | TYF120.5p | 0.17 | 12417.5/19.5 |
| JP Morg | B | 4KX6K | TYH125/127 c 1X1.5 | 0.23 | 12418/18.5 |
| Yesterday they bought abouth the same amount and open interest up in both so adding to position. | |||||
| Paper | B | 500 | TYH127c | 0.33 | ^12315.5 |
| JP Morg | B | 4KX6K | TYG124.5/126c 1X1.5 | 0.15 | 12416/17 |
| Paper | B | 500 | TYZ125.5/126.5/127.5 c fly | 0.07 | 12417/18 |
| New Edge | B | 4KX16K | TYF125/128c 1X4 | .15 and .16 | 12406 to 10 |
| Paper | B | 7,500 | TYZ122 p | 0.03 | 12406 area |
| 30yr. | |||||
| Paper | B | 1,500 | USF124p | 0.47 | ^12424 |
| Merril | B | 1,500 | USF132/USH134 c diag USH over | 0.21 | N/A |
| Vision | B | 3,500 | USF120/131 strangle | .57 to 1.00 | N/A |
| This was covering a short position for a small loss according to floor sources | |||||
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