Despite a late day rally in the stock market accompanied by a surge in yields, both bond yields and stock yields closed deep in the red.
Moreover, Fed fund futures as noted by CME Fedwatch imply another 75 basis point cut and I agree it’s very likely.
Yield Probabilities
A week ago the expectation for March 2, the expectation for the FOMC meeting on March 18 was for the Fed to hold steady, then at 175-200 basis points.
On March 3, I noted Fed Makes Surprise Inter-Meeting 50 Basis Point Rate Cut
Some of us were not surprised and I was in that group.
Today we see market expectations of another 75 basis points. That would put the Fed Funds rate at 25-50 basis points. Wow.
Options Market Maker Carried Out
The market staged a late day rally but still closed on the red.
ZeroHedge has a fascinating story what happened: “Someone Big Was Utterly Blown The F**k Out”: Here’s The Reason Behind Today’s Unprecedented VIX Move
As the following chat session between three individuals, which includes a former CME index option trader (X), all of whom wish to remain anonymous lays out, what happened is that the VIX ramped as a major Chicago market maker was caught in the infamous gamma short squeeze, which forced them to keep buying the VIX as the VIX soared, in the process ending the VIX even higher, only to get margin called out of their position by their clearing firm, puking their entire position while liquidating anything they could, and unleashing the VIX selling avalanche and the 700 Dow point rally.
X: Someone got carried out of the pit in spx options 15 minutes ago
X: Utterly blown the f*ck out
X: Their clearing firm literally liquidated some big market maker in Chicago hahahaha
X: Go to Ceres today
Y: Omfg
X: Someone big literally doesn’t exist anymore
X: WE’RE RUINED MORTIMER
X: It caused a huge dislocation in the vix
X: You could see them blow out
Q: Vix 52
Q: 14 day vol is 60 lol
Q: Bro
Q: Someone big in Chicago just got carried out of the pit
Q: Their clearing firm mega puking them out CAUSED A SEVEN POINT POP IN THE VIX
Q: Reversed in minutes
Q: MORTIMER WE’RE RUINED lmfao
That’s a partial transcript.
I see no other reports on that story, but given action in the VIX, Fed Fund Futures, Oil, etc., it seems very credible.
When you sell options and are not properly hedged, this is exactly the kind of thing that can happen.
Mike “Mish” Shedlock
Can someone please explain the exact or estimated timeline of what was liquidated and why. The conversation between traders is somewhat cryptic to me. What was being held on leverage, for what purpose etc.
This link explains the Vix index. You can see the timeline in Mish’s chart above.
Thanks
Japan 10yr yield … -0.134
German 10yr yield … -0.712
Only a matter of time till Treasury 10 yr joins the club.
Bloodbath in the gold mining stocks today even as gold rises. Look out below!
Good thing the Fed started raising rates 8 years ago (when Obama was in office), so now they have lots of wiggle room.
What?! They didn’t?!
What is the likelihood of the Fed Funds rate going negative?
Right now the odds are pretty good.
I think the Fed has looked at Japan and EU and will not do it
They’d be worried about the dollar. The DXY currency index has fallen from around a 100 at the end of Feb to about 96. Trading with a 95 handle for part of yesterday.
Wow if this out performance of the bond market keeps up, pension funds will be 100% funded. The fixed income crowd, banks, insurers, etc., are having the best of times at the moment with the collapsing rates. The elderly will be overjoyed opening their brokerage statements next month and seeing crazy gains in their longer-term fixed income. In most cases, fully offsetting stock market losses.
Of course, not sustainable, but at least for the moment… Hyperbolic moves never tend to end well.
Yes, it has been a great ride for bondholders. I’m one of them. Zero coupon Treasuries. I’ve been selling into this rally. At a certain point, there is no rationale for continuing to hold the bond, once its yield-to-maturity approaches zero. You are left with only the possibility of an eventual capital loss.
Wrong – Pension plans have avoided Treasuries like the plague – Yield too low
Mish is right – while bond prices may have soared generating overall asset returns for their portfolio, the collapse in interest rates has exploded the pension LIABILITIES by even more
Pension plans (and the trustees who invest the assets) much prefer high interest rates because it means their liabilities are lower and they can easily invest in risk-free assets (whatever that really means) to defray those liabilities….
Of course, eventually a reversal will come to hurt the pensions, but they aren’t forced to mark their long-term bond portfolios’ present value to the same assumptions of long-term returns. That’s a huge error. If they marked their long-term assets to the sort of long-term returns that they’re assuming, their assets would likely fall in value by at least half. But for the moment, solvency and returns should look good, and bonuses/fees paid to executives accordingly.
Bottom line: low rates good for pensions/elderly/insurers/banks. High rates bad for pensions/elderly/insurers/banks. The best of times are being had by those invested in the fixed income market at the moment.
Commercial banks don’t like low interest rates. They can’t reduce depositors rates at the same pace so their margin is squeezed. Depositors won’t rush to put their money into savings accounts at zero etc.
dislocation is very fun, I guess enjoy your pain
Mortimer needs to collect his $1 bet.
I LOVE when this happens!