Halister News

(Bloomberg) -- While volatility has increased at times since the March roll, “expired geopolitical risks and resilient market depth ought to deliver subdued moves through the current period,” JPMorgan strategists led by Joshua Younger said in May 10 note. 

• Effects of June FOMC hike odds (around 80%) and “flat to slightly negative” T-bill supply are offsetting and shouldn’t impact the roll this cycle
• NOTE: First notice for June Treasury futures contracts is May 31
• Bullish TUM7/TUU7
  • Asset managers remain net long, though not by a “statistically significant amount relative to overall open interest” in TU contract; net shorts held by other investors have “noticeably increased”
  • Evidence suggests rolling activity by these other investors has a greater impact on price action than asset manager positions
• Bullish FVM7/FVU7
  • Asset managers have “significantly reduced” their long positions to ~31% of open interest
  • This means primary driver of the roll will be relative value
  • buying in front vs back CTD
• Bearish TYM7/TYU7
  • Asset managers and other investors remain net long, though to a “lesser degree than previous cycles”
  • Evidence suggests asset manager positioning is a “still-significant driver” of price action around the roll period, which means this is bearish for the TY calendar spread
• Bullish UXYM7/UXYU7
  • Asset managers and dealers have been net short for most of the life of the contract, “and we are currently in the middle of the range”
  • UXY weighted calendar spread has consistently richened into the first notice date since the contract’s inception
• Bullish USM7/USU7
  • Sensitivity of price action around roll period relative to positioning has decreased substantially and at this point there’s “not much of a statistically significant relationship”
  • TBAC’s advice against an ultra-long bond and in favor of a 20Y accounts for some of the recent cheapening of USM7; “to the extent that these positions are rolled is bullish for the weighted calendar spread”
• Bearish WNM7/WNU7
  • Asset manager positioning remains near all-time high net longs, nearly half total open interest in WN contract
  • Wildcard optionality still a “key consideration” and gets priced in as first notice date nears

To contact the reporter on this story: Alexandra Harris in New York at aharris48@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang

(Bloomberg) -- Collapsed optionality in TLT and IEF Treasury ETFs provides low-carry directional view on any positive surprise on U.S. tax reform, given expectations have crumbled, Bloomberg strategist Tanvir Sandhu writes.

• Rates volatility has collapsed to near-record lows given range trading in yields with reduced expectations of growth, and with investors now believing the lofty fiscal expectations (highlighted here, here and here) seen following the election of Trump were overdone
• The swing in tax-reform expectations to the low side is now at risk of being surprised back to the upside, particularly with the passage of healthcare reform
• TLT (20Y+) and IEF (7-10Y) Treasury ETF volatilities have collapsed across the term structure with 3-month implieds near all-time lows, see chart here, while 25-delta call/put spread remains close to zero
• While the Fed terminal rate lacks escape velocity with inflation lacking any traction, the next upward pressure on long-dated yields requires an increase in term premium via tax reform among other factors, regardless of whether the expected path for short rates remains little changed
• U.S. economic surprise has deteriorated, with hard data failing to gain traction to scare bulls off versus stronger soft numbers, and moderation of recent macro data surveys is limiting the short- term upside for U.S. rates
• U.S. stock market is for the moment giving the administration some time on fiscal expansion given that legislation is a slow process while earnings data have been resilient
  • While the bull run may continue with recession probabilities low, the high valuations may be at risk of unwinding if data don’t strengthen and no powerful fiscal elixir is delivered
  • SPX 1-month implied volatility hit the lowest level on record last week, being pulled down by realized vol remaining stubbornly low at 7%. A growth slowdown would be consistent with lower market returns and higher volatility
• NOTE: Low vol strategies selling vol may not end well. It may not be ending just yet as negative carry invites more sellers, compressing vols further. A regime shift in vol will be best captured with long-convexity exposure combined with tactical shorts rather than tail-risk strategies betting on mean-reverting vol spikes, see analysis here
• NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Tanvir Sandhu in London at tsandhu17@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Anil Varma

(Bloomberg) -- Following are forecasts for today’s U.S. economic releases as compiled by Bloomberg News:

• Ind. Prod. 0.4% m/m; range 0% to 1.1% (73 estimates)
• Cap. Util. 76.3%; range 75.9% to 76.7% (54 estimates)
• Manu. Prod. 0.4% m/m; range -0.4% to 0.8% (24 estimates)
• • "Gains in manufacturing could be limited as other gauges suggest modest activity": Bloomberg Intelligence
  • In March, total production rose 0.5 percent, reflecting a record increase in utility output; factory output declined amid weakness in the auto industry

(Bloomberg) -- Following are forecasts for today’s U.S. economic releases as compiled by Bloomberg News:

• Housing Starts 1260k; range 1215k to 1300k (72 estimates)
• Starts 3.7% m/m; range 0% to 7% (72 estimates)
• Build Permits 1270k; range 1220k to 1300k (46 estimates)
• Permits 0.2% m/m; range -3.7% to 2.6% (46 estimates)
• • "Harsh weather in March was behind the 6.8% decline in housing starts, as the sector’s hours worked dropped. In April, hours worked fully recovered from the previous month’s plunge as the weather normalized": Bloomberg Intelligence
  • The March decline was the second since the start of the year

(Bloomberg) -- International Business Machines Corp. is selling its biggest euro bond sale since 2013 less than a fortnight after a double credit rating downgrade.

• Co. will price an EU2b two-part deal due in 8Y and 12Y, its largest same-day sale in the currency since raising EU2.5b in Oct. 2013, data compiled by Bloomberg show
• Moody’s and S&PGR both cut the co.’s rating by one notch at the start of this month on profitability and cash flow pressure concerns
  • Moody’s said in a May 3 report it is concerned IBM “will remain challenged for a longer than previously anticipated time to grow total revenue" and boost margins, as it cut its rating on the co. to A1
    • Also said IBM’s high investment level had negatively impacted profitability and cash flow
  • Two days later S&PGR lowered its rating on IBM to A+, citing operating declines as the co. continues to invest in transforming its business; also said the “transition to operating stability will take longer" than previously forecast
• IBM reported its 20th straight quarterly revenue decline in April as sales fell short of analysts’ estimates for the first time in a year
  • Follows years of investments in higher-growth areas and shifting the co. away from older products like computers and operating system software
  • Earlier this month billionaire Berkshire Hathaway Inc. chairman and chief executive Warren Buffett said he sold about a third of his investment in IBM as he doesn’t value the company “the same way that I did six years ago when I started buying”
• IBM will use proceeds from today’s deal for general corporate purposes; it also raised $2.75b in a four-part offering in the U.S. market in January
• NOTE: IBM has $3.9b of debt due this year, DDIS function shows
• Some information from person familiar with the matter, who is not authorized to speak publicly and asked not to be identified

To contact the reporter on this story: Leo Laikola in Helsinki at llaikola@bloomberg.net To contact the editors responsible for this story: Tom Freke at tfreke@bloomberg.net Hannah Benjamin