Steps towards Normalcy

As vix Touches 50 long way from the 110 & 120 calls being in the money markets are taking the small steps back towards normal functionality.I like the volatility and chaos I like when markets are inefficient,oh well.Some metrics that indicate steps back towards normal markets:

First Cross currency basis swaps between JPY and USD the more negative the swap moves the more expensive it is to acquire dollars.This is is a smaller graph but you get the idea the swap spread is almost positive !indicating ample dollars available, whereas at the apex of Crisis the index was greater then -150 intra day.

This is the IBOXX Investment grade corp bond Index, a proxy for the IG corporate bond market.Quick eye ball test show this index has clawed back roughly half its losses

Now this one is a bit tougher for me to understand,but this is a Graph of the spread of 2 year cash notes linked to the futures complex and A cash bond that is not linked.It shows the strains or abnormalities in the Basis trade , spread spike out of its normal range but now has found it way back to pre crisis levels. this is from BBG
lastly the Spread between 2 year Overnight interest rate swaps minus 2 year treasury yields the higher the spread the more worries about Financial stress in markets and concern about counter party lending risk This is another BBG spread that has returned to pre crisis levels.

Stock Sell off

Once the daily press briefing From New York Gov Cuomo started Stocks started to give back Daily gains some of his comments:

Virus is more dangerous then expected Cases jump 14% OVERNIGHT

This ends when we get a face track test -kit

Unemployment hotline has 1.2 million calls in a week usually have 50K

Also UK Minister Gove with some sobering comments regarding virus right around same time Cuomo was speaking so a double dose of bad news.On the good news front, Italy reported a small uptick in Cases today they are at a 2 week low.

Today’s Economic data surprised to the upside but I don’t think we should believe it.Both Chicago PMI and Consumer Confidence was less bad then feared ,probably best to ignore it then read too much into it.San Francisco president Daly says that “U.S. likely already in recession,She expects things to get worse before they get better” uplifting

Below find the Morgan Stanley,G7 currency “vix” dormant for months but not for long

Morning 3-31

  The Worst is Behind us regarding Virus, maybe not a peak but possible light at end of tunnel?

(Reuters) – Australia on Tuesday reported a sustained fall in the country’s rate of new coronavirus infections but officials and experts warned against complacency, stressing the need for further strict social distancing policies

(Reuters) In Spain the daily infection increase has slowed since the introduction of lockdown measures, falling to 12% on average in the past five days from around 20% in the preceding 10 days, said health emergency spokeswoman Maria Jose Sierra

China released latest PMI data and it surprised to upside quite handsomely, Can we believe China, probably not but still Number was much better then expected The Official NBS Manufacturing PMI in China surged to 52.0 in March 2020 from a record low of 35.7 in the previous month, easily beating market expectations of 45. The latest reading pointed to the strongest pace of expansion in the sector since September 2017 as many companies resumed operating following February’s restrict lockdown measures. Still, the NBS cautioned that the readings may not signal a stabilisation in economic activity. Non-manufacturing PMI  * China  Mar Non-Mfg PMI 52.3, 29.6 prev

A bit of Optimism regarding Cases from Italy

Newly Infected vs. Newly Recovered in Italy 

A screenshot of a social media post

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   Quarter end today But Fiscal year end in Japan saw some gyrations in domestic products into respected closed but on the day JGBs yield lower ,JPY down and NKY closed down .88%.European Stocks bid early in morning  but have given back most of the Games as New York Comes on line Dax at one point +2% now little changed. Spoos -10 handles and Nasdaq little changed. Johnson and Johnson (JnJ) announced a vaccine candidate that could be available early next year, this provided a bit of optimism over night that helped with bid in Stocks. I mentioned a bit of Optimism regarding the Virus and that maybe the worst is behind us but that does not hold true for Economy and Economic data. From Goldman overnight

“Bad news: @GoldmanSachs now sees GDP declining at a rate of 34% in Q2 & unemployment spiking to 15% by midyear because of #coronavirus. Good news: Goldman boosts recovery forecast, seeing more than half the output decline made up by yearend”

 This is one of the reasons that Congress is already talking about another Stimulus package that will be debated, discussed once the House returns later this month. More negative for economy where the Light at end of Tunnel is Blocked still.

“The restaurant industry employs one-tenth of the American workforce. On OpenTable, bookings have been down 100% yearly in America for nine straight days (21st to 29th) and they are down 100% globally. The industry has already lost 3 million jobs and $25 billion in sales since March 1st (Upfina).

“In the 10 days between March 16 and March 25, some 1.55 million Canadians applied for jobless benefits. Canadian jobless claims averaged about 207,000 in the last three days of the data, compared with about 133,000 in the seven days before that. Thursday’s U.S. jobless claims number could be higher than the last report (3.283 million). The U.S. labor force is eight times larger than Canada’s.” (Mizuho)

* The VIX closed below 60 yesterday for the first time in more than two weeks, ending its record run of consecutive closes above 60 at 10 trading days. Prior record was 8 trading days in November 2008. (@mktoutperform)


 Bonds lower but off worse levels of day Spoos lower as they have comer off highs some 50 handles off best levels of day. Credit markets are alive and that is good thing last week saw a record amount of IG deals come to market and this week starting off hot as well. A big Deal today is Carnival Cruise lines is trying to sell Debt, Curios to see how markets react. First notice day for April Gold, I am not sleeping on this contract I will be on lookout for any Fireworks into Close. Dollar higher for second consecutive day, I won’t say uptrend back on I want to wait til Quarter end is Behind us. Italy overnight sold a handful of debt which appears to be well received, once auction completed   BTPs hav erased all gains and are down 40 + ticks. Oil a bit higher Copper +.5% and Gold Down Markets without a theme this morning maybe Quarter end is the theme

Benchmark Oil grades

Crude oil dipped below $20 overnight but this is only one type or grade of Oil WTI ,West Texas intermediate lets look a the Canadian benchmark WCS, Western Canadian Select it is almost a zero!

Now lets look at the Shale Benchmark or at least the Texas Shale benchmark,WTI Midland.This to headed in the wrong direction if you aere a shale producer or in the right direction if you Are Saudi Arabia or Russian Oil Producer.


Open Interest where did it go?

Graphs and Commentary via Reuters. Helps to understand why markets are so thin lately as positions are closed and standing on Sidelines is profitable stance.

GRAPHIC – Open Interest sharply lower…a visual journey Mar 30 2020 07:47 by Divyang Shah Our earlier comment focused on the reduction in open interest for Treasury, Bund, Gilt and VIX futures. You can read the comment titled “Open Interest sharply lower, liquidity/depth issues remain” at nL8N2BN29D. The charts below show the reduction in open interest for the above futures contracts… Chart 1: Treasury Open Interest Chart 2: Bund Open Interest Chart 3: Gilt Open Interest Chart 4: VIX Open Interest VIX OI IMAGE : Treasury OI IMAGE : Bund OI IMAGE : Gilts OI IMAGE :
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Treasury issuance vs. Fed’s QE | Global Macro Strategy-Morgan Stanley

From Morgan Stanley Bold prints are my own

Cross-currents of Treasury issuance vs. the Fed’s QE have been driving Treasuries. We think the Fed will switch to buying more long-end Treasuries, and the Treasury will complement the Fed by increasing issuance largely in the front end. Both the Fed and Treasury’s actions support being long 30s.
We think the Fed is likely to buy more back-end Treasuries as it switches from liquidity-focused QE to portfolio balance channel-focused QE. We see the Fed switching to a more regular monthly QE schedule, as it tapers the daily Treasury purchases. We see the Treasury complementing the Fed’s actions by focusing issuance in the front end of the curve.

We see the Treasury adopting a neutral issuance strategy by maintaining the weighted average maturity (WAM) of issuance around or slightly below current levels. In a recent presentation in February, the Treasury Borrowing Advisory Committee (TBAC) has already advised the Treasury to not offset the Fed’s actions in QE. While the TBAC presentation in February was intended as a long-term planning suggestion, the conclusions lend themselves well to the current environment. We think both the Fed’s and the Treasury’s actions support being long back-end Treasuries.

We continue to suggest investors stay long 30-year bonds, and add more if yields rise above 1.50%. Our economists see a ~$3.7 trillion deficit needed to be financed in CY20, which we think will be financed with a combination of $2.4 trillion net bill issuance and $1.3 trillion net coupon issuance. We detail our expected monthly coupon forecasts based on these projections.

We continue to expect the 20-year note to be issued starting in May. T-bills as a % of total outstanding UST debt will increase from 13% presently to 21% by the end of 2020. This 8pp increase is similar to the increase in the nine months between June 2008 and March 2009.
(Morgan Stanley)

A few graphs and Things

Daily 10 year Yields
Daily 30 year yields
Quarterly change for SPX not going to end on a high note,set for worst quarterly drop in years

last one from Bloomberg it appears everone wants T-bills in fact maybe starting to see a shortage?

“Meanwhile, last week saw a record volume ($60 billion) of one- month bills come up for auction. The prior week saw an awarded yield of 0.03%, which isn’t great but is still better than negative. So what was demand like for Thursday’s massive offering? Well, the bid/cover ratio tells the story — despite the massive size of the auction, investors showed up in record volumes to buy four-week paper at par. (The bid/cover ratio was not a record, but applying it to the auction size produces a total bid size of $284 billion.)”

Morning 3-30

Relatively Quiet Start to trade so far today. Virus cases have not peaked Latest update 735,000 cases and 34k deaths. Spain has Overtaken China in Number of reported cases and regrettably reported largest number of fatalities yesterday at 537.President trump has extended the social distancing program by  2 more weeks as cases in U.S. continue to trend higher latest update 142,793 cases  and 2490 deaths, president also said close to 100k may die. Rumors continue to swirl about a Tokyo Lockdown causing some steep loses in NKY in early trade, the index did rally but still closed lower by 1.57%,10 year yield a bit lower by 1 Bps. Stocks a touch weaker, Spoos were rallying into Asian Close likely following NKY higher but ran into some Sellers once European traders came online, A hefty 120 handle range in Spoos but they like most worldwide stocks trading lower. Crude Oil Dipped below $20 last night a 17-year low! Month End tomorrow and A busy Economic Calendar as March Numbers will be reported traders want to see if the Economic fallout is as bad as the markets are pricing. Dollar higher today, not good for “Risk” assets


Fitch cut Britain’s sovereign debt rating late Friday, saying the country’s debt levels would increase as the government boost spending to combat the rapid spread of Covid-19 and uncertainty surrounding trade negotiations with the European Union also posed risks (Trading economics)

Australia announced an $80 B job rescue plan and Japan hinting at larger cash payouts to her citizens (BBG)

The People’s Bank of China unexpectedly lowered its 7-day reverse repo interest rate by 20 basis points to 2.2 percent on March 30th, 2020. It is the third rate cut since November and the biggest slash in nearly five years as policymakers step up efforts to support the economy battling with the coronavirus. The central bank also pumped CNY 50 billion ($7 billion) into money markets through seven-day reverse repos, the first cash injection in 29 days via the liquidity tool. (trading Economics)

The economic sentiment indicator in the Euro Area dropped 8.9 points from the previous month to 94.5 in March 2020, suffering its steepest monthly decline since records began in 1985. Morale deteriorated sharply among service providers (-2.2 vs 11.1 in February), retailers (-8.3 vs -0.2), manufacturers (-10.8 vs -6.2), constructors (2.7 vs 5.4) and consumers (-11.6 vs -6.6). Among the bloc’s largest economies, sentiment fell sharpest in Italy, the European country worst hit by the health crisis, and in Germany

Virus news (ITC Markets)

WSJ: Kansas Doctors are using 2 drugs together to treat advanced C-19 symptoms, hydroxychloroquine and azithromycin  

-Free Radio Asia: Wuhan residents are growing increasingly skeptical about the official death toll of ~2500 based on the number of funeral homes returning cremated remains to families

-Dr Anthony Fauci, US Dir at Nat Inst Of Allergy/Infectious Diseases: C-19 could cause between 100- 200k deaths with millions of cases


  Month end tomorrow and then focus on US and China Economic Data points. Tonight at 8:00 China releases her first PMI data and then tomorrow AT 8:45 another round of PMI data. Fed will be buying $75 billion a day in QE last week was one of the tightest ranges in 10 year yields we have seen in a few weeks; it appears the Feds buying has calmed markets down a bit. The MOVE index or a measure of Volatility in treasury Complex closed at lowest levels on Friday in roughly a. month


How about this sector of the Economy real estate,you would think with low rates that activity would be bustling as people rush to refinance or buy new homes with rates at historic lows.Something else to ponder is that with the rapid collapse in aggregate demand how many people will not be able to pay mortgage how many will default?

A few comments from Zero hedge:

Earlier this week, we highlighted the fact that numerous mortgage-related companies were facing considerable – and in some cases existential – crises in their day-to-day operations amid margin calls, illiquidity, and a drying up of demand for non-agency products thanks to The Fed’s intervention.

 “AG Mortgage Investment Trust which last Friday said it failed to meet some margin calls and doesn’t expect to be able to meet future margin calls with its current financing. Then it was TPG RE Finance Trust which also hit a liquidity wall and could not repay its lenders. Then, on Monday it was first Invesco, then ED&F Man Capital, and then  the mortgage mayhem took down MFA Financial, which stated “due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus, the Company and its subsidiaries have received an unusually high number of margin calls from financing counterparties, and have also experienced higher funding costs in respect of its repurchase agreements.”

And now that mortgage-mayhem has impacted one of the largest U.S. mortgage firms catering to riskier borrowers.

Earlier in the week, we mentioned Angel Oak Mortgage Solutions – which specializes in so-called non-qualified mortgages that can’t be sold to Fannie Mae or Freddie Mac – pointing out that the company would pause all originations of loans for two weeks “due to the constant shifts and the inability to appropriately evaluate credit risk.”

And now Sreeni Prabhu, co-chief executive officer of the firm’s parent, Angel Oak Cos., is slashing 70% of the comany’s workforce (almost 200 of its 275 employees).”

Below is a weekly Graph of the Bloomberg Reit index of capitalization-weighted index of real estate investment trusts. look at the collapse in this spread ,look at the volatility in a product that has shown little volatility over the years.Another product or asset that is impacted by Covid-19