4.25% repo on 10Y and other volatility warnings

Hammock over the emptinessWe saw some pretty unusual stuff on the markets last week. There is a lot of nervosity in the markets. A foretale of more significant moves?

 

The crazy stuff

  • The repo on the 10 Y treasury has reached 4.25% on Thursday, which is more than the failure to deliver rate. The demand for borrow was such that virtually all the bonds at the treasury fed ($14.5 bn) were on loan.

10Y overnight repo rate

  •  Rates were on historical lows. When rate rally started, all the investors rushed to the door at the same time. It’s not over; analysts are forecasting a further increase in the yield.
  • On Friday, the S&P dropped ~2% from its opening, before closing up 1.95%. Those typed of behaviors are typical of a strong market nervosity (read “volatility”), even if it is not materialized yet in the close-to-close volatility calculations.

S&P Giration

  • On the S&P, Friday was one of the largest intra-day reversal ever:

  • Actually, the VIX rallied up to 32 on Powell’s speech, before closing back at 24 on Friday

VIX move

  • There was a rotation of stocks in the S&P, with notably a rally of the most shorted stocks

Most shorted stocks

 

Going forward…

  • The rates are not rising just in the US. It is a global issue

Rising rates over the world

  •  The equity market is overvalued, but the Fed and the new 1.9 Tn stimulus plan supports the economy. The eternal question is – for how long? Could an event trigger a crash?
  • Talking about a possible event, Nick Panigirtzoglou, JP Morgan’s quant analyst, 60:40 funds now have to rebalance and sell an estimated $107 Bn of equities. This will come on top of $110 bn of redemptions from pension investors, $22 Bn from Norges Bank, and $34 from Japan’s government pension fund, bringing the expected selling pressures on equities around $316 Bn for the end of this quarter.

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Written by Gontran de Quillacq

Gontran de Quillacq is an expert witness and a legal consultant. He is a recognized authority in options, trading, derivatives, structured products, portfolio management, hedge funds, mathematical finance, quantitative investment, strategy research and financial markets in general.

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