Submitted by Tyler Durden on 09/26/2011 16:54 -0400
S&P futures managed an impressive 2.5% rally today making it back to the closing level from last Wednesday (Bernanke-Day) amid merely average volume. The leaked rumors of the EU’s octuple-down CDO^2 bet on themselves was enough to get the buy-the-rumor juices flowing and we rapidly squeezed higher. IG outperformed, ending the day notably tighter than respective equity and HY spreads would expect as even though risk seemed on, we did not see a mad scramble for high beta and HY bonds remained offered in general. Gold and Silver managed a huge bounce off intraday lows ending the day -1.5 to 2% while the dollar sold off into the close (as EUR rallied) to end the day unch from Friday. ES ended a little rich relative to risk-assets in general as the small cap short squeeze seemed to take-over.
While much hope was place in ‘Operation Twist’ having similar portfolio rebalancing effects as QE2, it is clear that the reach-for-risk is not occurring as up-in-quality remains evident with IG notably outperforming (in CDS and cash). HY kept pace with ES today as can be seen but single-names underperformed and HY bonds were net sold all day as both index arbitrage and unwinding macro hedges as long exposure is sold down helped HY optically.
TSYs sold off and steepened quite significantly on the day but even more so from early morning low yields to closing levels. 30Y yields increased over 15bps from low to high today – ending +9bps from Friday’s close. 2Y and 5Y are now both 6bps or so higher in yield from pre-Bernanke, 7Y marginally higher in yield, 10Y only 4bps lower while 30Y maintains over 20bps of yield compression since FOMC-day.
There was a very strange move in HYG (the HY bond ETF) as the EU’s SIV was announced. Significantly out of the ordinary volume surged as HYG jumped 1-2%. This move was unaccompanied by ES, S&P, JNK, interest rates, HY CDS, or HY bonds. It had the very strong feeling of someone being forced-in as perhaps margin calls or a short was squeezed to make uneconomical trades. The move is extremely evident when we look at it in the context of SPY, VXX, and TLT (which can be used to construct an arbitrageable opportunity).
The spike in ‘Model’ in the chart above shows the dramatic disconnect – as big as we have seen while following this framework and the profitable
convergence of that ETF arbitrage over the next hour or so. Given how wide HY spreads are and access to CDS markets, perhaps someone had been using HYG as their macro cover and as it broke resistance highs of the last couple of days and filled the gap up to Bernanke-Day lows, it was all they could take. Decent volume and net-selling in HY could also help explain as perhaps the ETF manager was forced to create units and had to buy what everyone was selling in cash? It remains a mystery but worth watching HY CDX and cash markets for any fallout (BWICs) – and we note a large VWAP order (to sell) at the close.
While HYG was an interesting sideline, Gold and Silver recovered from a disastrous early session and was the real show of the day. Silver was down over 16% in the early hours of the morning only to recover to down only 1.2% by the close. Gold managed to pull back from over 7% down to less than 2% down. Oil and Copper pulled into the green as risk was bid again in the afternoon but traded very much in sync all day long – though not particularly focused on FX volatility.
The dollar managed a wholly unimpressive 0.3% drop from Friday’s close but the moves were not particularly high conviction even as EURUSD managed to creep back over 1.35 into the close as it seems levering up German taxes is good for the currency of choice. By the close, every major was stronger vs the USD with CAD and JPY the least strong of the pairs (and SEK the strongest).
All-in-all, the rise in S&P futures was impressive (though low volume as usual) and risk-assets in general followed suit for the initial move (as seen below) but as it wore on it seemed to become a combination of a search for Bernanke’s Day bottom as well as a small cap short squeeze that drove ES notably expensive in the context of carry FX, gold, oil, TSYs, and credit. As we peaked, average trade size rose which always has the smell of professionals selling into strength but we have seen these kind of squeezes last longer than we expect before.
Charts: Bloomberg & Capital Context