March 3, 2021

1. The point spread is just one that raises players' eyebrows and has them think about putting money on the line on these point sports. In both basketball and football and baseball, the point spread is the most important thing to pay attention to when it comes to wagering.
2. With just three weeks left, TYJ 132.5 atm straddle settled 1’29 or 5.6 vol. In more ‘normal’ times the atm straddle is around 1 point with one month to go. –A lot of buying once again in EDU2/EDZ2 calendar with volume of 125k in that spread alone with a late quote of 13.5/14.0 (13.5s).
3. Last season the Kansas City Chiefs had to rally to win 31-20 and cover the 1.5-point spread. The over/under was 53. There was a long stretch of the underdog covering before the past two Super Bowls.

–Stocks surged, the curve flattened. Tens fell nearly 5 bps to154.5 before today’s auction (w/i was 155.5/155 at futures settle). 2/10 dropped 5.3 to 138.0. A tweet from Stephen Spratt (BBG) this morning: “RBA has gone bullet-proof on yield curve control program. By changing the repo borrowing cost for YCC bonds to 100 bps vs 25 bps normally, short selling just got incredibly expensive [on longer maturities]” As I would interpret this, it’s like a targeted rate hike, something the Fed vows not to do. Central banks appear to be open to ever-more proactive measures in an attempt to control rates. However, control in one place often leads to unexpected results in others. I think “bullet-proof” is overstating it, but I like the enthusiasm.
–The eurodollar curve flattened as well, with the red pack essentially unchanged and the golds +6.0. Volume was light. Implieds fell. EDU1/EDU2 one-year calendar edged to a new high of 14.5, up 0.5 on the day. There continues to be heavy buying of 9975/9962/9950 put butterfly on the EDU2 contract. On Monday +50k 0EQ version for just under 3 bps and yesterday it was the 0EU version which settled 2.75 vs unchanged futures at 9967.5 on volume >70k. Breakevens are essentially 9972 to 9953. These trades suggest reds are pretty much locked in, though higher inflation numbers could still create tension in this part of the curve.
–CPI today with yoy core expected 1.4%. Ten year auction as well, followed by thirties tomorrow. Monthly Budget Statement in the afternoon. GO BIG.
–The attached chart shows June Gold (GCM1) overlaid with aggregate open interest. It appears as though this year’s washout in gold prices has been accompanied by a drop in open interest (blue line), possibly indicated that weak hands have capitulated.

Typically, a point spread has odds of -110 for either side of the bet. In the example above between the Cowboys and Giants, the point spread is 4.5 points, while the odds are -110, meaning you would have to wager $110 to earn a profit of $100, or a profit of $0.91 for every dollar you bet.

Point Spread Olg

March 9, 2021

–Nasdaq yesterday accomplished a 10% decline from February’s highs. My first e-mail of the morning was from BBG, starting with “Tech shares get pummeled”. Of course as of this morning, futures are surging back with NQH up 267, and some of the news sites are braying about a Nasdaq comeback based on….futures. It’s a volatile market, subject to large move on no news. Recently many have pointed to long term rates or curve steepening as a catalyst for Nasdaq weakness, and are noting that yields are a touch lower this morning…before CPI tomorrow and auctions of 10s, 30s, tomorrow and Thursday.
–Today we get NFIB expected 97 from 95 last, and $58 billion of three year notes, which were 35 bps late yesterday versus a 2-yr of 16 bps. So there’s a decent amount of juice in that third year forward, which of course is reflected by the red/green euro$ pack spread (2nd to 3rd year) at a new high of 54 bps yesterday. In fact, all euro$ one-year calendars from EDU2/U3 thru EDM3/M4 made new highs yesterday; the peak is EDH3/EDH4 at 72.5, nearly 3/4%, up 3.5 on the day.
–Several large option trades suggest the market continues to pull forward the time for the start of Fed hikes. An exit sale of 15k USH 157/153 put spreads from 1’24 to 1’20. A new buy of 30k TYK 131.5/128ps for 45 to 47, settled 48 vs 131-28 with 34d. And in dollars, a new buy of 50k 0EQ (EDU2 underlying) 9975/9962/9950 put butterfly for 3.0 vs various futures, settled 2.75 vs 9967.5. The 10/30 spread declined by a few bps with the ten-year yield up 4 to 159.4, and thirties up just 1.6 bps to 230.3. However, late in the day there was a block of +3500 UXYM 145-19 vs sale of 5410 WNM at 185-02. Looks to me to be an extra $1.4m DV01 on the ultra bond. Just because the long bond yield is now rising more slowly than tens, doesn’t mean yields stop going up.

March 8, 2021
–“Hey don’t worry boss, I bought bonds AND gold to cushion any sort of unlikely sell off in stocks.” As of this writing, USM is 156-16, -23, a new low. GCJ is 1688.40, -10.1, a new low. NQH is 12431, down 233, but just above last week’s lows. Not too long ago, as bond yields hovered at all-time lows, the allure of holding fixed income for safety diminished significantly. Some portfolios chose gold as an alternative port in the storm. Others just used cash-rich big tech as their safe haven asset. However, price action like this morning’s might change sentiment from TINA (there is no alternative) to WASH [OUT] (Where Are Safe Havens?). The rise in yields and concurrent shift to an inflationary mindset make many asset classes vulnerable.
–The passage of the $1.9 trillion spending bill might foster another price boost. Oil, which was already in a solid uptrend, will likely be underpinned by yesterday’s attacks on Saudi oil infrastructure. This, at the same time Netanyahu assured Harris that Israel would never allow Iran to have nukes, and the Biden administration’s recalibration of policy toward KSA ushers in uncertainty with regard to policy responses in the Middle East, (and everywhere else). The problem is not Dr Seuss. We’re not in Solla Sollew. “And I learned that are troubles/Of more than one kind/Some come from ahead/ And some come from behind.”
–Sort of leaves physical supply of necessary commodities as the last true safety play. Which, of course, encourages hoarding.
–Many curve measures closed at new highs Friday, with vol snapping back. 2/10 ended 141.5, a new high up 0.6 on the day. Red/gold euro$ pack spread closed 157.125 also a new high. The peak one-year eurodollar calendar is EDH3/EDH4 which straddles the libor end date, at 69 bps. There have been times when one-year calendars have peaked well over 200 bps, but these were periods of the Fed either slashing or being expected to slash funding rates from much higher nominal rate regimes. However, we’ll see triple digit one-year calendars before long.

March 7, 2021 – Weekly Comment

For a while, I was using 2018 as a guidepost for levels regarding economic activity and prices. This was the euphoric period following Trump’s tax bill, when the Fed was in the process of simultaneously tapering and raising the FF target, i.e. ‘normalizing’. Last week, data from ISM Mfg and Services surveys showed prices have easily eclipsed 2018, with comparisons now going back to 2008. By the way in 2018, the Fed hiked the FF target in June to 1.75-2.0%, in Sept 2.0 – 2.25%, and in December 2.25 – 2.5%. The current ten-yr yield is only 1.55%.
The markets and the Fed don’t have any dispute about the path of prices in the near term. They are going up. The critical issue is whether general price increases are sustained, leading to accelerating inflation, or are transitory. The Fed of course, is in the latter camp. Powell has made more than a few comments indicating that’s his base case. For example, regarding the semi-conductor chip shortage that idled some auto manufacturing plants, he said the prices might go up for cars in the short term, but inflation is a year after year increase in prices, and he didn’t expect that. Same thing with respect to housing: covid altered people’s preferences for housing which led to a temporary increase in prices. Both Brainard and Powell referred to base effects in the past week, but deemed them transitory.
The market, on the other hand, is leaning heavily toward the idea of accelerating prices. Not only will the Fed get its 2% target, but there is overt concern that the target will be exceeded. By a lot. For the second week in a row, many curve measures finished at new highs. Premium levels fell in the early part of the week but roared back on Friday. I am updating the data I used last week:
2/19 2/26 chg to 2/26 3/5 chg 2/26 to 3/5
2/5 treas spd 46.5 59.7 13.2 64.5 4.8
10/30 treasury 79.2 74.1 -5.1 73.3 -0.8

Red/Grn ED 34.375 50.875 16.5 51.5 0.625

Grn/Blue ED 56.125 58.625 2.5 62.75 4.125
Blue/Gold ED 46.125 37.25 -8.875 42.87 5.625

Let me mention a couple of levels I was involved with in ED’s. EDM2 9900p, paid 2.5 ref 9976.0 on Thursday. Settled 2.75 vs 9977.0. These are 1 ¼ years away. Consider the levels: EDM2 is 23 bps vs current 3-month libor around 18. The futures market is more or less taking the Fed at its word of no hikes within a couple of years. One might think 1 bp would be a more appropriate price for the 1% strike, but demand for protection has increased.
On Friday EDU2 9900 puts traded 5.0 and 5.5 ref 9967.5/68. They settled 5.5 vs 9970.0. Again, the futures price, which is a year and a half forward, is just 12 bps above the current libor rate. On Friday prior to the NFP release, there was a buyer of >30k 0EU 9962.5 puts for 6.0 to 6.5. Settled 7.0 vs 9970.0 with an increase in open interest of 63k. These midcurves settle on 10-Sept 2021, and at 7, the breakeven is, of course, 9955.5, or 44.5 bps, just over ¼% away from the current libor marks.
These are some pretty juicy levels, but maybe they’re not juicy at all if the Fed is thrown into another round of disarray. The Fed agonizes over past mistakes in order to avoid repeating them. In 1994, they hiked too rapidly and caused the tequila crisis. (There were probably other issues, but I happen to like tequila). I recall a big bond local Tom Baldwin, who initially faded the move, but then just shrugged and said the waves of bond selling were obvious and decided to jump on. In the 2004 to 2006 hiking cycle the Fed was entirely predictable and slowly boiled the frog, hiking 25 at every meeting, though I don’t think they’ve ever re-examined that flattening episode in the context of a mistake. The recent repo surge in 2019 caused a slew of soul-searching papers and comments from the Fed…something NOT to be repeated. In 2018, hiking while ratcheting up the taper was a mistake that resulted in the hard equity break at the end of that year.
I feel as if the current period, with the Fed having changed its framework in August of 2020 and focused on employment rather than inflation, all at a time when fiscal jets are firing and covid is on the wane, is going to be the mother of all mistakes. The Fed is well aware that official yoy inflation data is going to ramp up, in part due to base effects from last year’s March and April data falling out. Just as a small example of how yoy figures can be impacted, Reuters reported that China’s “Exports in dollar terms skyrocketed 154.9% in Feb compared with a year earlier…”

These are difficult levels to short fixed income, especially in light of the magnitude of the move so far. News articles are rampant about treasury fails and the -4% repo rate. The Fed is promising to keep rates low and has the YCC bazooka in the back pocket for now. While the SLR exemption is expected to expire March 31, there are other measures the Fed could initiate to entice banks to buy treasuries. The RBA increased its bond purchases last week and Kuroda at BOJ made comments to stop the rise of Japanese yields. However, market flows are telling you to initiate shorts.
The two over-arching issues are inflation (boosted by growth) and supply. ZH had an article citing mining.com about lithium carbonate prices being driven by battery demand. “Benchmark’s global weighted average lithium hydroxide prices are up 8% ytd…” “While lithium’s majors are beginning to reengage in expansion plans, three years of falling lithium prices have failed to incentivise sufficient investment into the supply chain…” There is one article after another highlighting this dynamic: lack of investment in productive capabilities because low rates made financial engineering more profitable. Now supplies become an issue as demand ramps up.
WTI crude ended the week over $66/bbl. CPI and PPI are released Wed and Friday, with Core yoy expected 1.4% and 2.6% respectively. Treasury auctions 3s, 10s and 30s this week in the amounts of $58b, $38b, $24b. FOMC is March 17, the Fed is now in the quiet period.

March 5, 2021

–The market wasn’t overly impressed with Powell’s delivery yesterday. Curve steepened to new highs, stocks took a tumble. EDZ’25, the 20th quarterly contract or last gold, settled 9799.5 (down 10.5), the first settle above 2% since July 2019 when the FF target was 2.25 to 2.50. The red/gold euro$ pack spread has been exploding and settled 156.5 bps, up 9 on the day, which is about halfway from the 2013 high of just over 300 bps to the late 2018 low of just under zero. 2/10 ended at 141, up 8 bps to a new high. The ten year yield finished at 154.8, up 8.1.

–Implied vols perked up appreciably, and treasury options have become quite a bit looser in the past several days. With just three weeks left, TYJ 132.5 atm straddle settled 1’29 or 5.6 vol. In more ‘normal’ times the atm straddle is around 1 point with one month to go.
–A lot of buying once again in EDU2/EDZ2 calendar with volume of 125k in that spread alone with a late quote of 13.5/14.0 (13.5s). I suppose a part of it is the turn, although the Sept/Dec/March fly has been fairly well behaved, settling at 3.5. Current 3-month libor is around 18 (it’s bouncing around that level). EDZ2 settled 9956.5 for a spread of 25.5. There’s your first expected hike (which the market will continue to move forward as inflation figures accelerate). CLJ prints a new high of $65/bbl this morning.

–Employment report today to cap a busy first week in March. NFP expected 200k from 49 last. YOY Avg Hourly Earnings expected +5.3% from 5.4 last.

March 3, 2021

–After the surge in implied vol late last week, followed by the implosion the first two days in March, I can only refer to the Bricklayer’s accident report, which I reproduce here in full:

Dear Sir:

I am writing in response to your request for additional information in Block #3 of the accident reporting form. I put “Poor Planning” as the cause of my accident. You asked for a fuller explanation and I trust the following details will be sufficient.

I am a bricklayer by trade. On the day of the accident, I was working alone on the roof of a new six-story building. When I completed my work, I found I had some bricks left over which when weighed later were found to weigh 240 lbs. Rather than carry the bricks down by hand, I decided to lower them in a barrel by using a pulley which was attached to the side of the building at the sixth floor.

Securing the rope at ground level, I went up to the roof, swung the barrel out and loaded the bricks into it. Then I went down and untied the rope, holding it tightly to insure a slow descent of the 240 lbs of bricks. You will note on the accident reporting form that my weight is 135 lbs.

Due to my surprise at being jerked off the ground so suddenly, I lost my presence of mind and forgot to let go of the rope. Needless to say, I proceeded at a rapid rate up the side of the building.

In the vicinity of the third floor, I met the barrel which was now proceeding downward at an equally impressive speed. This explains the fractured skull, minor abrasions and the broken collarbone, as listed in Section 3, accident reporting form.

Slowed only slightly, I continued my rapid ascent, not stopping until the fingers of my right hand were two knuckles deep into the pulley which I mentioned in Paragraph 2 of this correspondence. Fortunately by this time I had regained my presence of mind and was able to hold the rope, in spite of the excruciating pain I was now beginning to experience.

At approximately the same time, however, the barrel of bricks hit the ground-and the bottom fell out of the barrel. Now devoid of the weight of the bricks, the barrel weighed approximately 50 lbs.

I refer you again to my weight. As you might imagine, I began a rapid descent down the side of the building.

In the vicinity of the third floor, I met the barrel coming up. This accounts for the two fractured ankles, broken tooth and severe lacerations of my legs and lower body.

Here my luck began to change slightly. The encounter with the barrel seemed to slow me enough to lessen my injuries when I fell into the pile of bricks and fortunately only three vertebrae were cracked.I am sorry to report, however, as I lay there on the pile of bricks, in pain, unable to move and watching the empty barrel six stories above me, I again lost my composure and presence of mind and let go of the rope.
http://www.physics.smu.edu/scalise/www/misc/bricks.html

So here we are. These are atm straddle prices for TYJ:
2/23 vs 134-105 1’21,
2/24 vs 134-025 1’25, (loading the barrel)
2/25 vs 132-185 2’09 (the sixth floor),
2/26 vs 132-23 1’48 (in the vicinity of the third floor),
3/1 vs 133-08 1’24 (nearing ground level)
3/2 vs 133-175 1’13 (on the pile of bricks)

–Yesterday featured a flatter eurodollar curve, led higher by blues which ended up 6 on the day. The ten year note fell 4 bps to yield 140.3. However, there was still notable buying of blue midcurve put spreads vs selling of call spreads. For example, new open interest of 26k was a buyer of 3EN 9850/9812ps (8.75s) vs 9887/9912cs (6.0s), vs EDU’24 9864.5. Paper paid 3.5 early with 35d vs 9862.5. Also heavy buying of EDU2/EDZ2 at 10.5/11, settled 11.5, leading to a jump in open int of 81k to 682k in EDZ2 on new shorts there. (EDU2 rose 20k).
–Powell speaks Thursday, with Brainard laying the groundwork yesterday. The Fed is dismissive of upcoming inflation data and current price surges. That message, having been repeated several times recently, provides no comfort to long bond holders (let go of the rope).
–From Brainard: “A burst of transitory inflation seems more probable than a durable shift above target in the inflation trend and an unmooring of inflation expectations to the upside. …These changes mean that we will not tighten monetary policy solely in response to a strong labor market. The long-standing presumption that accommodation should be reduced preemptively when the unemployment rate nears estimates of the neutral rate in anticipation of high inflation that is unlikely to materialize risks an unwarranted loss of opportunity for many of the most economically vulnerable Americans.”

March 1, 2021

–Quick news skim this morning includes the following snippets/headlines:
Reuters: Eurozone factory activity raced along in February thanks to soaring demand, a survey showed on Monday, although the burst of business led to a shortage of raw materials and a spike in input costs. Bloomberg: Food prices are soaring faster than inflation and incomes
Financial Times: Freeport [FCX] signals enduring cash bonanza from copper price boom
MySteel.net : Carbon steel prices in China’s domestic spot and futures markets moved up further over Feb 22-26, propelled by sustained optimism about business fundamentals
Business Insider: Everything is about to get more expensive. It’s a crucial next step for the US economic recovery
–When it trickles into business insider, with of course, a biased slant to bring indispensable meaning into otherwise incomprehensible ‘news’ then you know the market trend is long in the tooth. So bonds are bid this morning. Of course, RBA’s purchase of double ($4b rather than $2b) its daily bond intake caused Aussie 10’s to drop more than 10 bps in yield. Other CBs may follow with actions to stem long term yield increases.
–We ended the week with a flatter back end of the curve as the market moves the timing of Fed tightening forward. New highs in a few euro$ one-year calendars: EDZ21/EDZ22 gained 0.5 to 21.5, and EDH2/EDH3 also up 0.5 to 32.5. Both are close to 1/4%, indicating the market is starting to time late 2022 as an initial hike.
–Today a panel features Brainard, Williams, Bostic, Mester and Kashkari. Tomorrow Brainard speaks about the economic outlook, and Powell hones his message on Thursday.

Feb 28. 2021- Weekly comment

I didn’t watch much of Powell’s testimony this past week. But I did happen to catch CA Representative Brad Sherman’s monologue. This guy has been in Congress for thirty years. He starts by praising the ‘Fed Listens’ program and tells Powell, “I assure you your best ‘Fed listens’ event is right here. You will not find fifty people in better touch and more representative of the 320 million Americans.” In the next two minutes he brutally displays just how out of touch he actually is. He likes Powell’s ‘big balance sheet expansionary policy, and says “I would hope you would be looking at 2 ¼% rather than 2% as your target” Really? Why? He conveniently leaves out the word “INFLATION” target. I guess he thinks it’s better to reduce American’s purchasing power by another ¼% annually rather than just 2%. He goes on to commend Powell for QE, saying “…it has allowed you to remit to the Federal Gov’t $50 to $100 billion in each of the last several years…” Free money, right Brad? So, interest on the debt that is swapped between branches of the government is commendable? Continuing, “…QE and your big balance sheet approach is the only tool you have to influence long term rates, which I think are more important to the economy…” That’s how it works, huh? Maybe the Fed should just cap long-term rates. Finally, “I prefer monetary policy to expansionary fiscal policy because all of your tools reduce the federal deficit and all our tools increase the long term deficit.” All of the Fed’s tools reduce the federal deficit? What? This guy heads the entrepreneurial and capital markets subcommittee, yet he breathtakingly shows utter ignorance about how the Fed, capital markets and the economy work. I wouldn’t let Brad run a lemonade stand. He tells Powell, “I’ve grown old on this committee. I’ve heard your predecessor’s predecessor’s predecessor…” And should have added, AND I HAVE LEARNED NOTHING.
Here’s the link. 40:50 to 42:43.
https://www.youtube.com/watch?v=NIQ5moocXzM

So why does Brad Sherman make a difference? Because sometimes policy makers just don’t grasp what is going on around them. On this week of the Fed’s semi-annual Fed testimony that’s my takeaway. For example, Powell was completely dismissive in his response to a question about 25% yoy growth in M2, saying “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time. …the correlation between different aggregates [like] M2 and inflation is just very, very low and you see that now, where inflation is at 1 ¼% for this year.”
A comment from Steve Hanke: “Chairman Powell is clearly delusional. I can’t believe the Chairman of a central bank actually said that. Broad money measures are linked very closely to nominal GDP and nominal GDP includes real economic growth plus inflation.”
Powell is not delusional. He is so focused on regaining full employment that all other scenarios are being ignored, and he believes that an increase in inflation will allow debtors to gracefully service heavy burdens. This week should be interesting with respect to Fed thoughts. On Monday, Brainard, Williams, Bostic, Mester and Kashkari participate on a virtual panel. On Tuesday Brainard discusses the economic outlook, and Daly speaks to the Economic Club of NY. Evans on Thursday. Powell discusses the economy on Thursday, and payrolls are out on Friday.
Below I highlight a few changes on the week that reflect changing sentiment. The market is pulling forward the idea of Fed tightening. There was so much volume on the week that CME stock actually bucked the trend and closed higher despite renewed talk of a transaction tax. There were a couple of large TUM1/FVM1 block steepeners on Wed and Thursday just prior to the poorly received 7-yr auction which contributed to an epic 13.2 bp jump in 2/5’s (details at bottom). Let’s take a couple of moves Friday to Friday. I include marks from Thursday since that afternoon featured some extremes after the dismal 7-yr auction.
2/19 2/25 2/26 change
2/5 treas spd 46.5 64.0 59.7 13.2
10/30 treasury 79.2 74.7 74.1 -5.1

Red/Grn ED 34.375 50.375 50.875 16.5

Grn/Blue ED 56.125 58.625 58.625 2.5
Blue/Gold ED 46.125 39.375 37.25 -8.875
The steepness moved forward on the curve. The December FOMC had the FF projection at 0.1 through 2023. The market has pushed the idea of a hike forward by at least one year. The red/green Eurodollar pack spread jumped 16.2 bps! Reds are the 2022 contracts and Greens the 2023 contracts. That spread finished the week at 50.875; two hikes. If the Fed is on hold for two years but then in play, it makes sense that 2/5’s widened: 2’s were up 3.3 bps, but uncertainty in the next three years caused 5’s to jump nearly 18 bps.
If the Fed is forced to hit the brakes sooner than previously expected, then perhaps term premium and inflation premium should retrace some of the recent moves. Indeed that’s what happened. 10/30 treasury spread declined 5 bps and the closely related blue/gold Eurodollar pack spread (4^th to 5^th year forward) fell by almost 9 bps.

In my view, implied vols between fives and thirties captures the sentiment. As I have highlighted before, after March, US vol exploded relative to FV vol. The Fed was expected to have things under complete lockdown for three to four years, which pushed relative uncertainty into the long maturities. As a rule of thumb, the DV01 on the FV contract is about $55 and in the bond more like $200. In general, the ratio of DV01 US to FV is near 4. Should US vol be 4 times higher? No, because the action is usually in the belly of the curve. But after March, US vol became much greater than 4x more than FV vol. Following are several marks of this ratio of atm vols, US/FV.
Feb 23, 2020, 2.97. That is, bond vol 3x greater than FV vol; this is pre-pandemic
Apr 23, 2020, 5.30. Bond vol now significantly above a long term average relative to FV
Feb 19, 2021, 4.19. This is the Friday before last
Feb 26, 2021, 3.19. Friday’s close; getting back to ‘normal’

For anyone interested I will send a chart on Monday. In the early part of this year the ratio was 6, I believe the highest I saw over the past year was around 7.
The Fed Effective rate (EFFR) has been 7 to 8 bps through February, equating to 9993 to 9992 in FF prices. FFH1 settled 9993.0. The farthest out FF contract for which there is open interest is February 2023, and that settled 9972.0, a difference of 21 to the FFH1 contract 2 years forward, indicating 1 hike. In the beginning of this year FFG3 was 9987. In May many FF contracts traded above 100, at slightly negative yields.

OTHER MARKET THOUGHTS/ TRADES

In general, vol has been quite directional, which argues for long TY call ratios, buying lower leg, looking for small yield retracements.

WED BLOCK +28815 TUM 110-145/ -40569 FVM 124-25 FV is approx. $2.25million DV01
TH BLOCK +23062 TUM 110-115 / -18835 FVM 124-09.25 just over $1 million DV01

February 26, 2021

–Monster day with yields soaring. Belly led the rout, with fives up 17 bps to 79.2 as the 7-year auction was poorly rec’d. Tens up 12.6 bps to 150.8 and bonds rose just 7 to 230.5. Bloomberg noted that the ten-year yield just eclipsed the S&P dividend yield. All euro$ one-year calendars made new highs. EDU1/U2 which had been struggling around 5 to 7 gained 6 bps to close at 13.5. Peak one-year is EDH23/EDH24 at 68.5, it gained 10.5 bps yesterday! Volumes were so large that the CME’s daily bulletin for eurodollar futures shows 0548373 (lacks the needed digit to show greater than 10 million). Blues (4th year forward) were weakest on the dollar curve, down over 22 bps!
–In Oct 2018, Powell said we’re nowhere close to neutral. Stocks tanked. By Christmas, the Fed’s tone changed, and easing followed. The recent mantra is that “we’re nowhere close to full employment”. How does the Fed walk back the vow of endless accommodation, now that the market is anticipating inflation and higher long-end rates? Tighten to flatten the curve? Or hint at YCC? A Reuters piece said Kuroda is calling for “stably low” rates as the 10yr JGB hits 15 bps, above what I believe is the “cap” of 10. Central bank jawboning guidance may not be able to rein in markets that see a lack of institutional support for the purchasing power of fiat currency. Dudley was right about the possibility of a tantrum…and recall that in 1987 it was a bond tantrum of sorts (over several months) that preceded the stock crash.
–Vols exploded in rates. As an example, on Nov 23, about three months ago, I noted these levels: EDU22 9962.5^ 17.0 vs 9967 and EDU23 9950 ^ 41.5 vs 9954.5. At the time, these were the last red and green respectively, long dated straddles. Now three months later, here are prices for the exact same contracts (now in the third slot). EDU2 9962.5^ 31.5 vs 9968 and EDU3 9912.5^ 75.5 vs 9906.5. As another example, the atm TYM straddle settled 2’19 on Wednesday, and 3’07 yesterday. Tens have officially reached the panicky level of over 6%.
–In what is perhaps the final affront to civilization as we know it, Hasbro is removing the “Mr.” from Mr. Potato Head. I had to scroll a big F U last night on my etch-a-sketch.

Feb 25, 2021

–I got a call yesterday from a friend (DK) telling me that the Aug/Oct Live Hog spread was blowing out to new historic highs. I have traded most futures contracts at one time or another, but have never been involved in the meats. It might be because the meat desk at Refco could have been its own sitcom… scared me off. In any case, I took a closer look at the Aug/Oct spread. Supposedly, it’s a seasonal sale, but the nearer contract is just crushing the deferred, and the spread is making new all-time highs. It has never been above 13.50, but now trades 14.45. We might ask, what does it have to do with anything else? I have previously posted some charts on grains which show the same dynamic: front contracts are strong. Here’s the hog spread:

–I also took a look at a deferred WTI one-year crude oil spread, the 6th contract to the 18th contract. In the pandemic pandemonium when the front contract went negative, the calendar was hugely inverted at about -7 dollars. Now, the magnitude is nearly the same, but the front contract is at a premium of about 6.50. Typically, I think of aggressive demand of fronts vs deferred as an indication of tight supplies. The spread chart is in the lower panel.
–In connection with that, at Powell’s testimony yesterday, there was a question about inflation. Powell gave a rather interesting example, relating to the shortage of computer chips that has choked off the manufacture and supply of autos. He said that inflation is an increase in prices which occurs year after year, and although the price of cars may go up due to this temporary shortage, it’s essentially a one-off event. He also was asked about the 25% year-over-year growth of M2, and he flippantly said that the monetary aggregates USED to have predictive capabilities, but now they don’t.
–The Fed is being very clear about NOT being worried about inflation. Brainard also gave a rather interesting speech on the Fed’s thinking about the labor market yesterday as well. The Fed is not worried, but one example after another shows that the MARKET IS WORRIED. Just ask the guy who is short the near contracts….
–Yesterday rates rose, with 10’s up 2.2 bps to 138.2. The curve continued a steepening bias. 5/30 posted a new high 162.7 (using old 5y). Today treasury auctions sevens. EDM3/EDU3, the libor extension kink, settled +1 at 21. The highest settle has been 21.5. One-year calendars on that part of the curve closed at new highs. For example, EDM2/EDM3 closed at 31, up 1.5 on the day, and EDU2/EDU3 at 48, up 2.5 on the day. Option plays continue to favor long puts or put spreads vs calls.

Spread betting is any of various types of wagering on the outcome of an event where the pay-off is based on the accuracy of the wager, rather than a simple 'win or lose' outcome, such as fixed-odds (or money-line) betting or parimutuel betting.

A spread is a range of outcomes and the bet is whether the outcome will be above or below the spread. Spread betting has been a major growth market in the UK in recent years, with the number of gamblers heading towards one million.^[1] Financial spread betting (see below) can carry a high level of risk if there is no 'stop'.^[2] In the UK, spread betting is regulated by the Financial Conduct Authority rather than the Gambling Commission.^[3]

Purpose[edit]

The general purpose of spread betting is to create an active market for both sides of a binary wager, even if the outcome of an event may appear prima facie to be biased towards one side or the other. In a sporting event a strong team may be matched up against a historically weaker team; almost every game has a favorite and an underdog. If the wager is simply 'Will the favorite win?', more bets are likely to be made for the favorite, possibly to such an extent that there would be very few betters willing to take the underdog.

The point spread is essentially a handicap towards the underdog. The wager becomes 'Will the favorite win by more than the point spread?' The point spread can be moved to any level to create an equal number of participants on each side of the wager. This allows a bookmaker to act as a market maker by accepting wagers on both sides of the spread. The bookmaker charges a commission, or vigorish, and acts as the counterparty for each participant. As long as the total amount wagered on each side is roughly equal, the bookmaker is unconcerned with the actual outcome; profits instead come from the commissions.

Because the spread is intended to create an equal number of wagers on either side, the implied probability is 50% for both sides of the wager. To profit, the bookmaker must pay one side (or both sides) less than this notional amount. In practice, spreads may be perceived as slightly favoring one side, and bookmakers often revise their odds to manage their event risk.

One important assumption is that to be credited with a win, either team only needs to win by the minimum of the rules of the game, without regard to the margin of victory. This implies that teams in a winning position will not necessarily try to extend their margin—and more importantly, each team is only playing to win rather than to beat the point spread. This assumption does not necessarily hold in all situations. For example, at the end of a season, the total points scored by a team can affect future events such as playoff seeding and positioning for the amateur draft, and teams may 'run up' the score in such situations. In virtually all sports, players and other on-field contributors are forbidden from being involved in sports betting and thus have no incentive to consider the point spread during play; any attempt to manipulate the outcome of a game for gambling purposes would be considered match fixing, and the penalty is typically a lifetime banishment from the sport; such is the lack of tolerance for manipulating the result of a sporting event for such purposes.

Spreads in sports wagering (U.S.)[edit]

Spread betting was invented by Charles K. McNeil, a mathematics teacher from Connecticut who became a bookmaker in Chicago in the 1940s.^[4] In North America, the gambler usually wagers that the difference between the scores of two teams will be less than or greater than the value specified by the bookmaker, with even money for either option. An example:

• The bookmaker advertises a spread of 4 points in a certain game;
  • If the gamblers bet on the 'underdog', they are said to take the points and will win if the underdog's score plus the spread is greater than the favorite's score.
    • The eventual score is Underdog 8, Favorite 10: 8 + 4 > 10, so the gambler wins;
    • The eventual score is Underdog 8, Favorite 13: 8 + 4 < 13, so the gambler loses.
  • If the gamblers bet on the 'favorite', they give the points (sometimes called lay the points) and will win if the favorite's score minus the spread is greater than the underdog's score:
    • The eventual score is Underdog 5, Favorite 10: 10 – 4 > 5, so the gambler wins;
    • The eventual score is Underdog 8, Favorite 10: 10 – 4 < 8, so the gambler loses.
  • Ties aka 'Push'
    • The eventual score is Underdog 9, Favorite 13: 9 + 4 = 13, so the gambler ties 'pushes'. The reverse is also the same the gambler takes the favorite and it is 13 - 4 = 9

Spreads are frequently, though not always, specified in half-point fractions to eliminate the possibility of a tie, known as a push. In the event of a push, the game is considered no action, and no money is won or lost. However, this is not a desirable outcome for the sports book, as they are forced to refund every bet, and although both the book and its bettors will be even, if the cost of overhead is taken into account, the book has actually lost money by taking bets on the event. Sports books are generally permitted to state 'ties win' or 'ties lose' to avoid the necessity of refunding every bet.

Betting on sporting events has long been the most popular form of spread betting. Whilst most bets the casino offers to players have a built in house edge, betting on the spread offers an opportunity for the astute gambler. When a casino accepts a spread bet, it gives the player the odds of 10 to 11, or -110. That means that for every 11 dollars the player wagers, the player will win 10, slightly lower than an even money bet. If team A is playing team B, the casino is not concerned with who wins the game; they are only concerned with taking an equal amount of money of both sides. For example, if one player takes team A and the other takes team B and each wager $110 to win $100, it doesn't matter what team wins; the casino makes money. They take $100 of the $110 from the losing bet and pay the winner, keeping the extra $10 for themselves. This is the house edge. The goal of the casino is to set a line that encourages an equal amount of action on both sides, thereby guaranteeing a profit. This also explains how money can be made by the astute gambler. If casinos set lines to encourage an equal amount of money on both sides, it sets them based on the public perception of the team, not necessarily the real strength of the teams. Many things can affect public perception, which moves the line away from what the real line should be. This gap between the Vegas line, the real line, and differences between other sports books betting lines and spreads is where value can be found.

A teaser is a bet that alters the spread in the gambler's favor by a predetermined margin – in American football the teaser margin is often six points. For example, if the line is 3.5 points and bettors want to place a teaser bet on the underdog, they take 9.5 points instead; a teaser bet on the favorite would mean that the gambler takes 2.5 points instead of having to give the 3.5. In return for the additional points, the payout if the gambler wins is less than even money, or the gambler must wager on more than one event and both events must win. In this way it is very similar to a parlay. At some establishments, the 'reverse teaser' also exists, which alters the spread against the gambler, who gets paid at more than evens if the bet wins.

Sports spread betting[edit]

In the United Kingdom, sports spread betting became popular in the late 1980s by offering an alternative form of sports wagering to traditional fixed odds, or fixed-risk, betting. With fixed odds betting, a gambler places a fixed-risk stake on stated fractional or decimal odds on the outcome of a sporting event that would give a known return for that outcome occurring or a known loss if that outcome doesn't occur (the initial stake). With sports spread betting, gamblers are instead betting on whether a specified outcome in a sports event will end up being above or below a ‘spread’ offered by a sports spread betting firm, with profits or losses determined by how much above or below the spread the final outcome finishes at.

The spread on offer will refer to the betting firm's prediction on the range of a final outcome for a particular occurrence in a sports event, e.g., the total number of goals to be scored in a football (US: soccer) match, the number of runs to be scored by a team in a cricket match or the number of lengths between the winner and second-placed finisher in a horse race.

The gambler can elect to ‘buy’ or ‘sell’ on the spread depending on whether they think the final outcome will be higher than the top end of the spread on offer, or lower than the bottom end of the spread. The more right the gambler is then the more they will win, but the more wrong they are then the more they can lose.

The level of the gambler's profit or loss will be determined by the stake size selected for the bet, multiplied by the number of unit points above or below the gambler's bet level. This reflects the fundamental difference between sports spread betting and fixed odds sports betting in that both the level of winnings and level of losses are not fixed and can end up being many multiples of the original stake size selected.

For example, in a cricket match a sports spread betting firm may list the spread of a team's predicted runs at 340 – 350. The gambler can elect to ‘buy’ at 350 if they think the team will score more than 350 runs in total, or sell at 340 if they think the team will score less than 340. If the gambler elects to buy at 350 and the team scores 400 runs in total, the gambler will have won 50 unit points multiplied by their initial stake. But if the team only scores 300 runs then the gambler will have lost 50 unit points multiplied by their initial stake.

It is important to note the difference between spreads in sports wagering in the U.S. and sports spread betting in the UK. In the U.S. betting on the spread is effectively still a fixed risk bet on a line offered by the bookmaker with a known return if the gambler correctly bets with either the underdog or the favourite on the line offered and a known loss if the gambler incorrectly bets on the line. In the UK betting above or below the spread does not have a known final profit or loss, with these figures determined by the number of unit points the level of the final outcome ends up being either above or below the spread, multiplied by the stake chosen by the gambler.

For UK spread betting firms, any final outcome that finishes in the middle of the spread will result in profits from both sides of the book as both buyers and sellers will have ended up making unit point losses. So in the example above, if the cricket team ended up scoring 345 runs both buyers at 350 and sellers at 340 would have ended up with losses of five unit points multiplied by their stake.

Bets on the total (over/under)[edit]

In addition to the spread bet, a very common 'side bet' on an event is the total (commonly called the over/under or O/U) bet. This is a bet on the total number of points scored by both teams. Suppose team A is playing team B and the total is set at 44.5 points. If the final score is team A 24, team B 17, the total is 41 and bettors who took the under will win. If the final score is team A 30, team B 31, the total is 61 and bettors who took the over will win. The total is popular because it allows gamblers to bet on their overall perception of the game (e.g., a high-scoring offensive show or a defensive battle) without needing to pick the actual winner.

In the UK, these bets are sometimes called spread bets, but rather than a simple win/loss, the bet pays more or less depending on how far from the spread the final result is.

Example: In a football match the bookmaker believes that 12 or 13 corners will occur, thus the spread is set at 12–13.

• A gambler believes that there will be more than 13 corners, and 'buys' at £25 a point at 13.
  • If the number of corners is 16, the gambler wins (16–13) = 3 x £25.
  • If the number of corners is 10, the gambler loses (13–10) = 3 x £25.
• A 'sell' transaction is similar except that it is made against the bottom value of the spread.
• Often 'live pricing' changes the spread during the course of an event, increasing a profit or minimizing a loss.

In North American sports betting many of these wagers would be classified as over-under (or, more commonly today, total) bets rather than spread bets. However, these are for one side or another of a total only, and do not increase the amount won or lost as the actual moves away from the bookmaker's prediction. Instead, over-under or total bets are handled much like point-spread bets on a team, with the usual 10/11 (4.55%) commission applied. Many Nevada sports books allow these bets in parlays, just like team point spread bets. This makes it possible to bet, for instance, team A and the over, and be paid if both

team A 'covers' the point spread (wins by that amount or more)

and

the total score is higher than the book's prediction.

(Such parlays usually pay off at odds of 13:5 with no commission charge, just as a standard two-team parlay would.)

Mathematics[edit]

The mathematical analysis of spreads and spread betting is a large and growing subject. For example, sports that have simple 1-point scoring systems (e.g.,baseball, hockey, and soccer) may be analysed using Poisson and Skellam statistics.

Financial spread betting[edit]

By far the largest part of the official market in the UK concerns financial instruments; the leading spread-betting companies make most of their revenues from financial markets, their sports operations being much less significant. Financial spread betting in the United Kingdom closely resembles the futures and options markets, the major differences being

• the 'charge' occurs through a wider bid-offer spread;
• spread betting has a different tax regime compared with securities and futures exchanges (see below);
• spread betting is more flexible since it is not limited to exchange hours or definitions, can create new instruments relatively easily (e.g. individual stock futures), and may have guaranteed stop losses (see below); and
• the trading is off-exchange, with the contract existing directly between the market-making company and the client, rather than exchange-cleared, and is thus subject to a lower level of regulation.

Financial spread betting is a way to speculate on financial markets in the same way as trading a number of derivatives. In particular, the financial derivative Contract for difference (CFD) mirrors the spread bet in many ways. In fact, a number of financial derivative trading companies offer both financial spread bets and CFDs in parallel using the same trading platform.

Unlike fixed-odds betting, the amount won or lost can be unlimited as there is no single stake to limit any loss. However, it is usually possible to negotiate limits with the bookmaker:

Sports Point Spread Meaning

• A stop loss or stop automatically closes the bet if the spread moves against the gambler by a specified amount.
• A stop win, limit or take profit closes the bet when the spread moves in a gambler's favor by a specified amount.

Spread betting has moved outside the ambit of sport and financial markets (that is, those dealing solely with share, bonds and derivatives), to cover a wide range of markets, such as house prices.^[5] By paying attention to the external factors, such as weather and time of day, those who are betting using a point spread can be better prepared when it comes to obtaining a favorable outcome. Additionally, by avoiding the favourite-longshot bias, where the expected returns on bets placed at shorter odds exceed that of bets placed at the longer odds, and not betting with one's favorite team, but rather with the team that has been shown to be better when playing in a specific weather condition and time of day, the possibility of arriving at a positive outcome is increased.

Point Spread Nfl

Tax treatment[edit]

In the UK and some other European countries the profit from spread betting is free from tax. The tax authorities of these countries designate financial spread betting as gambling and not investing, meaning it is free from capital gains tax and stamp duty, despite the fact that it is regulated as a financial product by the Financial Conduct Authority in the UK. Most traders are also not liable for income tax unless they rely solely on their profits from financial spread betting to support themselves. The popularity of financial spread betting in the UK and some other European countries, compared to trading other speculative financial instruments such as CFDs and futures is partly due to this tax advantage. However, this also means any losses cannot be offset against future earnings for tax calculations.

Conversely, in most other countries financial spread betting income is considered taxable. For example, the Australian Tax Office issued a decision in March 2010 saying 'Yes, the gains from financial spread betting are assessable income under section 6-5 or section 15-15 of the ITAA 1997'.^[6] Similarly, any losses on the spread betting contracts are deductible. This has resulted in a much lower interest in financial spread betting in those countries.

Financial spread bet example[edit]

Suppose Lloyds Bank is trading on the market at 410p bid, and 411p offer. A spread-betting company is also offering 410-411p. We use cash bets with no definite expiry, or 'rolling daily bets' as they are referred to by the spread betting companies.

If I think the share price is going to go up, I might bet £10 a point (i.e., £10 per penny the shares moves) at 411p. We use the offer price since I am 'buying' the share (betting on its increase). Note that my total loss (if Lloyds Bank went to 0p) could be up to £4110, so this is as risky as buying 1000 of the shares normally.

If a bet goes overnight, the bettor is charged a financing cost (or receives it, if the bettor is shorting the stock). This might be set at LIBOR + a certain percentage, usually around 2-3%.

Thus, in the example, if Lloyds Bank are trading at 411p, then for every day I keep the bet open I am charged [taking finance cost to be 7%] ((411p x 10) * 7% / 365 ) = £0.78821 (or 78.8p)

On top of this, the bettor needs an amount as collateral in the spread-betting account to cover potential losses. Usually this is either 5 or 10% of the total exposure you are taking on but can go up to 100% on illiquid stocks. In this case £4110 * 0.1 or 0.05 = £411.00 or £205.50

If at the end of the bet Lloyds Bank traded at 400-401p, I need to cover that £4110 – £400*10 (£4000) = £110 difference by putting extra deposit (or collateral) into the account.

The punter usually receives all dividends and other corporate adjustments in the financing charge each night. For example, suppose Lloyds Bank goes ex-dividend with dividend of 23.5p. The bettor receives that amount. The exact amount received varies depending on the rules and policies of the spread betting company, and the taxes that are normally charged in the home tax country of the shares.

Terminology and acronyms[edit]

HoD

High of day (the highest price the market traded at for the day).

Intraday trader

A trader operating from within each day's trade times.

LoD

Low of day (the lowest price the market traded at for the day).

London Turn

The time when markets subtly change direction between 12:15 and 13:15 GMT with a regularity that is more than coincidental.

Market session

The time of day that is governed mostly by the regional stock markets. Times vary from broker to broker, but the following are typical: Asian session (22:30 to 08:45 GMT), European session (06:45 to 16:45 GMT), US session (13:00 to 21:30 GMT).

Spread

The difference between the ask and bid prices, which may vary between markets and between brokers substantially.

Dangers of financial spread betting[edit]

According to an article in The Times dated 10 April 2009, approximately 30,000 spread bet accounts were opened in the previous year, and that the largest study of gambling in the UK on behalf of the Gambling Commission found that serious problems developed in almost 15% of spread betters compared to 1% of other gambling.^[7] A report from Cass Business School found that only 1 in 5 gamblers ends up a winner.^[8] As noted in the report, this corresponds to the same ratio of successful gamblers in regular trading.^[9] Evidence from spread betting firms themselves actually put this closer to being 1 in 10 traders as being profitable.^{[citation needed]}

See also[edit]

Notes[edit]

1. ^The Sunday Times: 'World Cup to kick off boom in spread betting'
2. ^'The perils of spread-betting'. The Times. Sep 20, 2007. Archived from the original on July 19, 2008.
3. ^'Gambling Commission - Home'. www.gamblingcommission.gov.uk.
4. ^Gambling Times: What are the Odds?Archived 2011-02-04 at the Wayback Machine
5. ^The Sunday Times: Spread betting
6. ^'Income Tax – Assessable income derivation of income – spread betting'. Australian Government ATO. 3 March 2010. Retrieved 26 January 2011.
7. ^Budworth, David. 'Spread-betting fails investors in trouble'. thetimes.co.uk. Retrieved 11 October 2013.
8. ^Pfanner, Eric. 'Spread-bets on Cup venture into bizarre - Technology - International Herald Tribune'. The New York Times. Retrieved 11 October 2013.
9. ^Rayman, Richard. 'White Paper on Spread Betting'(PDF). Cass Business School. Retrieved 11 October 2013.

Further reading[edit]

• Malcolm Pryor (2007). The Financial Spread Betting Handbook. Harriman House. ISBN978-1-897597-93-4.
• John Piper (2007). Binary Betting. Harriman House. ISBN978-1-905641-23-9.
• Financial Services Authority, March 2007 review, Spread Betting Review