Mon, 11/09/2020 – 11:39
The trade he is referring to is a “punchy block sale” from this morning, which netted almost $8 million, and “drawing a line in the sand on a 10-year yield move beyond 0.95%.”
He adds that in assessing the potential for a sustained break-out above 1% for 10-year yields, traders will be looking at what today’s vaccine news means to a fiscal package and ultimately the Federal Reserve’s monetary-policy response.
One response to how high the 10Y could go comes from BMO’s Ian Lyngen, who writes this morning that “the combination of the vaccine news and ‘clarity’ on the political front has cleared the way for a meaningful selloff in Treasuries and outperformance in risk assets” a move which reflects “the progress toward a vaccine and an eventual end to the pandemic” than a Biden’s victory.
And while there is little question the Presidential election will be contested for a while – the duration of this challenge is yet another uncertainty, “the risk is on” with 10-year yields reaching the highest level since March 20th and our 1-handle target close at hand.
Once the 10Y does breach 1%, there is very to stop the move until an opening gap from March at 1.112% to 1.140% according to the rates strategist who adds that “this will present meaningful support in the event 1.0% is breached in this move and we suspect will eventually slow any bearishness.”
He then reminds readers that he has been warning about a bearish breakout for some time “and are willing to go with the move through 1.0% until the opening gap.”
In terms of positioning, the charts below show that while positions in 10s are relatively flat…
… there is still a huge and expanding short in the classic bond contract.
BMO’s read is that this allows further room for 10s to selloff – especially ahead of tomorrow’s auction.
And sure enough, Eurodollar traders are starting to see more hikes getting priced into 2023/2024 again according to Bloomberg’s Bollingbroke, who adds that there have also been some aggressive mid-curve put option buys – hedging more hike re-pricing in this part of the curve, to wit:
- Eurodollar futures curve sharply steeper with blue-pack contracts (Dec23-Sep24) lower by up to 12.5 basis points, as rate-hike premium starts to build beyond 2023. In options, demand for downside hedges emerges across mid-curve structures which covers around this area of the strip.
- Sep24 eurodollar futures lower by 12.5bp on the day, steepening 24-month spreads such as Sep22/Sep24 by 8bp on the day; price action on white-pack (Dec20-Sep21) and red-pack (Dec21-Sep22) relatively calm, with contracts unchanged to lower by 3.5bp
In short: while stocks are delighted by today’s newsflow, the surge higher in yields – and inflation expectations – may have sowed the seeds of the market’s next destruction once the realization that the Fed’s next rate hike may come much sooner than expected, starts spreading across trading desks.
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Author: Tyler Durden