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One week ago, Jeff Gundlach urged his twitter followers to take profit on his "top trade of 2019" he had put on just one month earlier at the Ira Sohn conference, buying rate vol, when the trade (in the form of a put-call straddle on TLT) had returned 22%.
In retrospect, Gundlach may have just scratched the tip of the iceberg, to mix metaphors, because after a drop, rate vol in the form of the MOVE index has once again spiked to multi-year highs even as equity vol remains surprisingly subdued (with oil vol somewhere in the middle).
Reason - Shift - Place - Rate - Surface
One reason for this may be a seismic shift taking place under the rate surface, as one or more dealers and/or clients, are unwinding a giant Eurodollar swaption, which has sent short-term vol into the stratosphere and is sending out painful shockwaves not only across the entire curve but various other asset classes too.
In his comment on today's key market moves, Nomura's derivative expert Charlie McElligott, says that today's main event is not whether oil will go up (or down) on the ongoing tensions in the Straits of Hormuz, or even how stocks will gyrate as the Fed's rate cut intentions are repriced following conflicting overnight economic data (- from China, + from the US), but whether there will be "further follow-through of this ongoing "stress event" in USD Rate Vol space, as the “upper left” - in the vol grid shown below - is "evidencing tremendous pain for Dealers who are hedging their short ATM positions "and exacerbating this outrageous front-end squeeze (as well as stop-outs from systematic “short vol” strategies because the entire surface is now “bid”)."
Repricing - End - Fed - Tightening - Cycle
The extremely painful repricing of the end of the Fed's tightening cycle, which has only accelerated in recent weeks, is shown in the vol cube below.
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