Esther rattles quiet market ahead of Jackson Hole and options expiry tomorrow…

It has been a choppy session thus far today, albeit confined to a 3 bps range until hawkish comments from Esther George (“not ready to provide more accommodation to the economy without…economy getting weaker”, although remember she did dissent at the last meeting so this isn’t a complete surprise) extended the range on the downside for Treasuries. As of 8:00 AM ET, Treasuries are 1.75 to 2.75 bps higher in yield led by the belly of the curve, while equity index futures are trading very small positive ahead of the cash open.

Treasuries opened slightly softer in Asian but then saw better Asian real money buying throughout the Tokyo afternoon, along with lifting of spread product in the belly, further underpinned by some profit taking/risk off trading by Asian accounts, leaving Treasuries better bid through the European open. However, some decent data out Europe (finally!) in the form of higher French and German flash PMI data weighed on the long end and helped steepen the curve. ECB minutes weighed on bunds and dragged Treasuries lower as well. A small bid on flare up in rhetoric between Japan and South Korea (South Korea to end military intelligence sharing with Japan) faltered on the George comments. Activity has been nondescript, as market seems to be keeping an eye out for Jackson Hole drive-by comments (i.e., George just now) ahead of Powell’s speech at 10 AM ET tomorrow.

Today’s calendar includes claims at 8:30 AM ET, followed by Markit PMIs at 9:45, LEI at 10:00, and KC Fed at 11 AM ET. Treasury will auction $7BN in reopened 30y TIPS at 1 PM ET, should not be a big deal. As of right now Harker (10 AM ET), Mester (11:30 AM), Kashkari (2:30 PM), Kaplan (3:10 PM) are set to speak, but there will likely be other snippets with everyone milling around the resort, so keep one eye on scrolling news page.

Okay, so for my hour or so of work today, let’s take a quick look at Quarterly option expiration for Treasuries tomorrow, but don’t get too excited as this is some of the lowest open interest I can remember:

4000        162.00        5000
2000        162.50        6000
6000        163.00     10,000
3000        163.50       5000
7000        164.00       7000
6000        164.50       2000***
11,000      165.00      4000
12,000      165.50        500
12,000      166.00     2000

47,000    129.50      66,000
12,000    129.75      31,000
84,000    130.00      53,000
16,000    130.25     15,000
30,000    130.50     20,000***
14,000    130.75        8000
83,000    131.00        6000
11,000    131.25          600
48,000    131.50        1000

31,000     118.50     40,000
14,000     118.75     23,000
32,000     119.00     46,000***
28,000     119.25     18,000
23,000     119.50       1000
***denotes at the money as of Thursday morning at 7:00 AM ET.

So, to reiterate, first observation is these are some of the very smallest open interest numbers I can remember for a quarterly expiration. 10/12K open interest in bonds is almost negligible even at 100% delta, while I can’t remember the last time there wasn’t any strike over 100K in TY quarterlies.

The largest open interest in TY calls is actually at 130 strike, so that is a nonstarter (since we traded well above the 130 strike all week and anyone short that call should have taken steps to negate further pain by now, but there are 83K calls open at 131, which we only took a short peek above last week and for a few minutes on Monday. With only 6K puts at 131, that strike is easily the largest disparity and has barely traded…. so all else equal, risk looks to be a trade up to 131-00 (131-08 to squeeze out the last hedges on the call).

The high open interest strike for both puts and calls and the high disparity on the put side is right here at 119-00, but there is 28K 119.25 calls and 23K 119.5 calls (vs only 1K 119.5 puts) that may help if the TY gets moving to the upside.

A little disappointing on the numbers and nothing that jumps out screaming like in other cycles, but worth keeping an eye on when Powell takes the stage 6 hours before expiration tomorrow….

Have a good day,