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Largest intra day move since Lehman crisis - BAML

FXStreet (Barcelona) - Analysts at Bank of America Merrill Lynch explained yesterday’s turmoil and volatility in the markets.

Key Quotes:

“"Treasury yields fell sharply yesterday, with the largest intraday move in the 10y since the Lehman crisis (down 36bp)”.

“It was triggered by weak US data (retail sales and Empire State manufacturing) on the back of a weak global growth picture, concerns about the spread of Ebola and continued weakness in the equity market."

"However, we do not believe that the move today can be entirely explained by fundamentals. First, rates have moved nearly twice as much as their historical beta to stocks (about 9bp in the 10y for 1 sigma move in S&P 500). Second, even after yesterday's weak data prints, 3Q GDP is tracking 2.7% (though lower than 3% previously)."

"And third, the market whipsawed significantly without any specific news and by the end of the day, 10y rates were only 8bp lower. This suggests lack of market liquidity and risk appetite."

"We believe much of the move was a function of positioning capitulation. By 11am, 2.5mn contracts had already traded in the 10y futures contract, which was more than 1.5 times the typical daily volume."

"Similarly, there were significant block trades in Eurodollars (60k) and 5y and 10y Treasury futures (27k contracts). This is contradictory to the improvement in survey measures of short positioning (such as the Stone and McCarthy survey)."

"It appears that these surveys did not capture the breadth of the possible tactical short duration positions in the market. We believe that the recent flattening of the skew surface may have been a better indicator of the underlying short base".

"The flattening of the skew surface has predicted subsequent declines in rates in a statistically significant way, possibly because this indicated the build-up of short positions."

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