Groupthink on Carry, Subordination, and Secondary Market Yields
Guest post by Peter Tchir of TF Market Advisors.
A boring start to the day as the market briefly attempted to rally but has since settled back to mixed. U.S. stock futures are up a touch, CDS indices across the board are basically unchanged, while Spanish and Italian bond yields drift lower once again. High Yield remained strong yesterday, particularly the ETF’s, one of the few signs of resilience yesterday.
The market will likely chop around based on headlines, which is painful enough to endure, but repeatedly reacting to the same headlines has hit new levels of annoyance. One of the EC members, whose career depends on keeping the Euro big and bureaucratic, comes out with some self serving piece of hopium and the market rallies. Merkel or some other high ranking German says Nein for the 1000th time, ahead of negotiations and we sell off. So and so says something and the market responds, regardless of whether that person is Hollande, or some backbencher from Austria.
Maybe we will see some strong data in the U.S. and we can attempt a “decoupling” rally here, but the reality is we are likely to be driven far more by rumors and stories out of Europe.
What Happened to the “Carry Trade”?
Remember when the carry trade was going to save Europe. That LTRO2 was great because all the banks were going to load up their sovereign’s bonds and ride carry to prosperity while at the same time ensuring that sovereigns could sell all the debt they wanted? Coming into LTRO2 the market had latched on to that idea. It was impossible to read a report or listen to the financial news without being told what a great idea the carry trade was.
What is the VIX future telling?
Guest post by Vix and more.
The last four days have seen a dramatic decline in all things related to the VIX. The cash/spot VIX is down 26% from last Wednesday’s close as I write this and the VIX futures have followed the VIX down to varying degrees. The graphic below shows the changes in all the VIX contracts during the last four days – a period during which the entire VIX futures term structure has fallen sharply.
As is usually the case, the decline in the front month (June) contract is the sharpest of the group and has actually exceeded the decline in the cash/spot VIX during the same period. With the June contract set to expire at the open of trading tomorrow, it is not surprising that the contract have been as volatile as the VIX index in the last few days. Note that at the other end of the term structure, the back month (February 2013) VIX futures contracts have fallen only 6.8%, about ¼ of the decline seen in the front month futures. Given where we are in the current expiration cycle (right at the very end), the changes in the other months relative to the front month VIX futures are in line with historical norms.
VXN Futures
Via Vix and more.
You really need a scorecard to keep up with the new product launches at the CBOE. Today was potentially a big one, with the launch of futures on the Nasdaq-100 Volatility Index, which most of us simply refer to as VXN or Vixen.
As the table below shows, the VIX continues to account for approximately 99% of the volatility index futures at the CBOE Futures Exchange (CFE). Today VXN futures (VN) traded 20 contracts on its opening day. While futures in the CBOE Emerging Markets ETF Volatility Index (VXEEM) are currently positioned at the #2 product at the CFE, VXN futures certainly have a lot of potential, with the likes of Apple (AAPL), Facebook (FB) and Google (GOOG) and other technology high fliers folded into this security.
On a related note, for anyone who may be interested, I authored the feature article, The Expanding Volatility Megaplex, in the current edition ofExpiring Monthly. This article chronicles the history of volatility indices and looks at how the CBOE has recently begun to aggressively expand the scope of volatility indices and turn these into product platforms for futures, options and exchanged-traded products.
Remember SPX 30 days ago?
Quick snapshot of the 30 day chart of ES Futures. A month ago, we traded at the same levels, we tried breaching the resistance, but the market reversed and plunged heavily. With many smart shorts very wrong over the past weeks, this squeeze has legs…Let’s see if we make or break this chart.
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