I’ve been watching markets obsessively as I usually do - some whack things are happening. Let’s drill down, change some apertures, and open up the kimonos (top 5 awful phrases imo, so every chance I get to share it…)
We’re back to these debt ceiling shenanigans again. Seemingly every year we go through this cock and clown show with some US politician beating their proverbial chest for some obsure or otherwise irrelevant (and potentially personal) agenda. So off they go to the debt ceiling factory to maniacally hold the entire American gov’t (and symbolically the planet) hostage, waving their hands around and implying the imminent collapse of just about everything.
Great, cool, very useful. Thank you politics & government.
VIX Me Baby One More Time
Sure these puns are something awful, but have you seen how high VIX contango is? (I promise to go back to normal English after the chart but heres a quick read on vix if you’re interested). The higher political tensions are being reflected in the VIX index - unsuprising given the recent banking failures and recession talk.
Nerdalert: medium term VIX futures looks p high on contango. As of right now (May 16) it’s printing above the 6% mark. Although not completely unheard of, its a relatively high reading so I’m cautious if/when shorting something like index vol.
CHARTS!
All this says to me is that mid-term contango is approaching top end limits and to look for signs of reversion given some “catalyst”…Maybe the debt ceiling doesn’t move, maybe earnings start (finally) tanking, maybe more regional bank failures freak people out…who knows.
Given all of this what is one to do? hedge short vol exposure? or sell aggressively into it if you’re in the ‘soft landing’ camp. Not looking at VRP today but worth looking into I imagine.
Regardless, this behaviour of vix aligns with heightened (manufactured) tensions re: debt ceiling, recession talk and the general backdrop of higher rates (less manufactured).
Rate my Yield
So a couple of interesting things have happened recently in rates land:
10y-5y spread is back in positive territory
SOFR futures are back above 5.1 and seemingly on the rise again
So mid-long term rates are showing some signs of normalizing while shorter term (SOFR) showing signs of a willingess to pay for protection.
Can soft landings also be bumpy? Anything is possible - we’re all just making it up as we go anyway.