Nomura Warns "Rates Vigilantes" Are At The Gates

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by Tyler Durden
Tuesday, Jan 18, 2022 - 04:31 PM

Nomura's Charlie McElligott began his note this morning with an ominous tone, warning that the Rates Vigilantes are at the gates and are now pushing through / above 4 hikes in ’22...

...(and with more “trending” to a 50bps hike out of the gate) - and with a chance now that IF the Eurodollar market were to go ahead and price a hike pushing towards a 50bps “rage liftoff” to start at the March meeting (I’m still paying little-to-no mind to talk of Jan)...

...the Fed will simply “have to” take what the market is dictating to them, despite me currently believing that the FOMC has little desire to do-so.

In the meantime, CTA Trend positioning keeps “winning” on this Rates / Bond momentum, as we see “-100% Short” signals across every G10 Bond and MM Rate in the model, while the aggregate $notional position of the G10 DM Bond “short” has grown now back to Nov ’21 levels and is > -2 z-score dating-back to ‘02:

But while CTAs are "all-in short", McElligott notes that probably the most critical security “level” in global bond markets right now is 127 in UST 10Y Treasury Futs (TYH2), because the Street is short just a massive amount of downside struck there in TYH2 Puts, with 321,729 of OI (while we continue blowing-through downside strikes of all levels, most notably the TYH2P 127.5 level and its 140,579 of OI and the 128 strike’s 105,818 of OI).

If that 127 level goes, the potential for a “short gamma / negative convexity” event grows substantially on Dealer hedging “accelerant” flows, which would push 10Y yields beyond 1.90% (to the inevitable 2.00% Maginot Line)...

As McElligott notes, US Equities are getting “starched” on-again on a pretty-standard “financial conditions tightening tantrum,” with 5Y Real Yields earlier leaping to highs (least negative) last seen Nov ’20 (hence Gold lower in conjunction), with the move in Reals again being particularly painful to “Secular Growth” Nasdaq, as “rich” valuation / high-multiple stocks continue to re-rate lower.

US Equities Index Options positioning into Op-Ex this week is particularly dicey, with Dealers’ in rather substantial “short Gamma vs spot” across the bigs, and huge chunks of that set to roll-off Friday:

  • SPX / SPY $Gamma -$5.2B (12.5%ile since 2014), “short Gamma vs Spot” below 4695, with ~36% of the $Gamma rolling-off Friday

  • QQQ $Gamma -$339.9mm (6.8%ile), “short Gamma vs Spot” below $387.09, with 58% rolling-off Friday (and substantial “Negative $Delta” -$17.1B / 2.7%ile)

  • IWM $Gamma -$311.0mm (7.5%Ile), “short Gamma vs Spot” below $220.05, with 53% rolling-off Friday (and substantial “Negative $Delta -$13.4B / 2.3%ile)

Finally, here are the lines in the sand to watch for various major equity indices (most notably S&P 500 and Nasdaq have yet to flip short among CTAs)...

  • Nikkei 225, currently -36.9% short, [28340.0], more selling under 27713.62 (-2.21%) to get to -68%, max short under 27710.78 (-2.22%), buying over 28724.5 (+1.36%) to get to 32% , more buying over 28727.34 (+1.37%) to get to 100%, flip to long over 28724.5 (+1.36%), max long over 28727.34 (+1.37%)

  • NASDAQ 100, currently 100.0% long, [15595.75], selling under 15210.38 (-2.47%) to get to -37%, more selling under 12436.34 (-20.26%) to get to -100% , flip to short under 15210.38 (-2.47%), max short under 12436.34 (-20.26%)

  • Russell 2000, currently -36.9% short, [2157.7], more selling under 2081.85 (-3.52%) to get to -68%, max short under 2081.63 (-3.53%), buying over 2246.04 (+4.09%) to get to 32% , more buying over 2246.26 (+4.10%) to get to 100% , flip to long over 2246.04 (+4.09%), max long over 2246.26 (+4.10%)

  • S&P 500, currently 100.0% long, [4654.75], selling under 4453.8 (-4.32%) to get to -37% , more selling under 3616.19 (-22.31%) to get to - 100% , flip to short under 4453.8 (-4.32%), max short under 3616.19 (-22.31%)

  • Euro Stoxx 50, currently 100.0% long, [4293.0], selling under 4105.14 (-4.38%) to get to -37% , more selling under 3336.64 (-22.28%) to get to -100%, flip to short under 4105.14 (-4.38%), max short under 3336.64 (-22.28%)

  • HangSeng CH, currently -100.0% short, [8465.0], buying over 8929.92 (+5.49%) to get to -32% , more buying over 10794.02 (+27.51%) to get to 68% , flip to long over 8930.77 (+5.50%), max long over 10794.02 (+27.51%)

Perhaps it is the breaching of these levels (and the subsequent, impossible-to-cope-with-for-The-Fed puke in stocks) that is what the term structure of rates is pricing in further out as the longer-dated yield curve is flattening drastically amid Fed policy-error expectations

And even closer, the forward swap market is hinting at rate-cuts being possible between 2024 and 2025...

And even more painfully for Main Street (as opposed to Wall Street), as Treasuries re-price the Fed’s now-clear assault on “too-easy” financial conditions via their pivot to “Inflation Hawks” as it has become a non-partisan political issue into mid-term elections - and with the knowledge that Mortgages have not yet even begun to feel the full sting of the coming market ownership reversal, as the Fed “puts back” supply to the private side, and GASP, forces actual “price discovery” - MBS spreads are already moving meaningfully wider... and with them affordability in the housing market evaporates completely.

And that will mean one thing... Get back to work Mr.Powell!