Quick thread here as I get a lot of questions with regards to “why the risk-off”.
• SPX Options expired last week dropping a huge amount of gamma which was protective of downside short term.
1/x
• CTAs are better buyers of US Bonds
To give you an idea the 30y UST signal is -50%.
If we sell-off 25bp in the next month that moves it to -62% but if we rally 25bp it moves it to -10%.
2/x
That evolution is only starting to be priced in the rates vol market.
Here you can see the tails for 3M expiry swaptions. The receiver vols (ie the ones for lower rates) have come back, but we're still far last month's vols esp 3M>10Y -25bp.
3/x
• Deleveraging will continue as PBs face more questions:
“Credit Suisse Halts Star Trader’s Fund on Risk Concerns”
That is the big driver lately. Convexity is still cheap but it has started to move.
4/x
• There are still some very large positions:
Equities: Taiwan obv but even DM are quite large.
Bonds: Market still short 30Y US
FX: AUDJPY/USDJPY/USDCHF
AUDJPY vols are still cheap so it's not surprising we get accidents
5/x
Also recent darlign trades like long USDTWD (given forwards were whacky) are now underwater. Which brings an added level of deleveraging.
6/x
Overall it's not a bad picture and there are reasons to be positive (vaccine, the whole world buying houses - except for me).
But fragility is increasing.
The turning point should be the June FOMC with how the Fed will deal with the better data both in urate and inflation.
7/7
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