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Futures Jerk Around Inexplicably In “Abysmally” Illiquid Markets

Futures Jerk Around Inexplicably In "Abysmally" Illiquid Markets



Futures Jerk Around Inexplicably In "Abysmally" Illiquid Markets Tyler Durden Fri, 06/26/2020 - 07:45

US index futures swung in an illiquid overnight session in which Bloomberg's Richard Breslow said "volumes have been utterly abysmal", concluding a volatile week for stocks, this time ignoring the resurgence in new virus infections across the country that sent them lower earlier in the week. European shares gained on low volumes, 10Y yields dropped by 1.5bps, while the dollar was unchanged.

And speaking of Breslow, he summarizes the overnight moves perfectly:

You know it’s going to be a tough day when the answer to the question of “why thus-and-so has done what it has, such as it has,” is simply, “because.” Ask for more color than that and you get a blank stare. Or, that the S&P 500 was up yesterday, so it’s sagging this morning.

So without trying to piece together a narrative, spoos are shrugging off concerns that a second wave of the pandemic could force policymakers to reverse plans to re-open. On Thursday, virus cases rose across the US by at least 39,818 the largest one-day increase of the pandemic. The governor of Texas temporarily stopped the state’s reopening on Thursday as infections and hospitalizations surged.

"Even though we continue to see some pretty scary virus numbers coming out of the U.S., it’s not really dented sentiment – not to any sustained degree at least," said Timothy Graf, head of EMEA macro strategy at State Street.

Graf added that recent temporary downward corrections of market optimism have had very little follow-through. And at least on Friday, he was spot on: the MSCI world equity index was up 0.3%, extending gains from late on Thursday.

"There is a disconnect between what you feel should be the case looking at virus numbers and equities and riskier currencies holding up relatively well and volatility receding, but at the same time we’ve never seen a policy response like this, not in the last 80 years at least," Graf explained. One wonders if that's how residents of the USSR felt in the mid/late 1980s?

There was a trace of capitalism left when Nike reported extremely disappointing earnings late on Thursday: the company reported Q4 20 EPS of -0.51, far worse than the exp. 0.07, revenue of 6.3bln also missed exp. 7.32bln, while Gross Margin plunged to 37.3% (exp, 43.5%, prev. Y/Y 45.5%).

In Europe, shares opened higher, with the Stoxx 600 up 0.8% and London's FTSE 100 up 1% in early trading. Air France-KLM climbed after securing a bailout from the Dutch government.

With China still closed, Asian markets traded mostly higher as the region took impetus from Wall Street after US regulators approved to relax Volcker rules, but with some advances in banking names retraced after-market following the Fed stress tests in which it capped dividend payments and banned share repurchases in Q3 for 34 of the largest banks. On Thursday, the Senate passed legislation that would impose mandatory sanctions on people or companies that back efforts by China to restrict Hong Kong’s autonomy, in another potential Sino-U.S. flashpoint. However, with China on holiday the news barely registered with either the Yuan or Chinese stocks.

The Bloomberg Dollar Spot Index held its ground and Treasuries were little changed amid quarter-end flows. The Treasury curve bull-flattened modestly with 10Y yield dropping, while the dollar traded mixed against G10 peers, with moves confined within narrow ranges; the yen led gains, supported by haven demand amid concerns over a second wave of coronavirus infections. The New Zealand dollar rose versus the greenback after the New Zealand Treasury Department documents showed RBNZ has limited scope to increase the size of its quantitative easing program under the existing indemnity with the government. The pound was steady and headed for its first weekly gain since early June following a week of choppy trading on variable risk sentiment. Demand for safe euro zone government debt was little changed, with Germany’s 10-year Bund yield close to monthly lows, at -0.479%.

Oil traded near $39 a barrel in New York as Russia slashed exports of its flagship crude Urals to the lowest in at least 10 years. Gold was near $1,765 an ounce, heading for a third weekly advance, the longest winning run since January. Copper was on track for a sixth weekly advance, with prices edging toward $6,000 a ton.

Economic data include personal income and spending, U. of Michigan sentiment survey

Market Snapshot

  • S&P 500 futures down 0.4% to 3,058.00
  • STOXX Europe 600 up 0.4% to 361.23
  • MXAP up 0.6% to 159.65
  • MXAPJ up 0.3% to 516.21
  • Nikkei up 1.1% to 22,512.08
  • Topix up 1% to 1,577.37
  • Hang Seng Index down 0.9% to 24,549.99
  • Shanghai Composite up 0.3% to 2,979.55
  • Sensex up 0.4% to 34,983.24
  • Australia S&P/ASX 200 up 1.5% to 5,904.08
  • Kospi up 1.1% to 2,134.65
  • German 10Y yield fell 0.5 bps to -0.473%
  • Euro up 0.09% to $1.1228
  • Brent Futures up 0.9% to $41.43/bbl
  • Italian 10Y yield rose 3.7 bps to 1.177%
  • Spanish 10Y yield fell 0.7 bps to 0.451%
  • Brent Futures up 1.4% to $41.64/bbl
  • Gold spot little changed at $1,763.36
  • U.S. Dollar Index down 0.1% to 97.33

Top Overnight News

  • ECB President Christine Lagarde said the recovery from the coronavirus pandemic will be “restrained” and will change parts of the economy permanently
  • The staggering pace of U.K. borrowing runs the risk of uprooting the market calm that has allowed pandemic relief efforts to run smoothly. Britain is likely to issue 410 billion pounds ($508 billion) of bonds for the fiscal year that runs through next March, almost 75% more than the previous record, according to the median estimate of a Bloomberg survey of primary dealers
  • Germany’s coronavirus infection rate fell to the lowest in three weeks, while the number of new cases remained well below the level at the height of the outbreak
  • Oil headed for just its second weekly decline since late April as a surge in coronavirus cases in the U.S. clouded the demand outlook, but the pessimism was tempered by signs Russia is determined to curb output

Asia-Pac markets traded mostly higher as the region took impetus from Wall St's financial-led gains after US regulators approved to relax Volcker rules, but with some advances in banking names retraced after-market following the Fed stress tests in which it capped dividend payments and banned share repurchases in Q3 for 34 of the largest banks. ASX 200 (+1.5%) was underpinned as the top-weighted financials mirrored the outperformance of the sector stateside and amid positive reports for some of the ‘Big 4’ including Nippon Life considering an additional investment NAB’s wealth management business and Westpac winning a Federal Court decision against ASIC’s appeal regarding the responsible lending suit. Conversely, Qantas was at the other end of the spectrum in which its shares fell on a resumption of trade following its recent announcement for an equity raising, mass job cuts, 100-planes grounding and revoke of its interim dividend. Nikkei 225 (+1.1%) was lifted by the positive momentum and with gains spearheaded by financials which saw the index climb back above the 22500 level, while the Hang Seng (-0.9%) lagged on return from its holiday closure and played catch up to yesterday’s losses. Furthermore, the absence of participants in mainland China and mixed US-China headlines also clouded sentiment after the US Senate passed the bill punishing China for Hong Kong actions, although it was also reported the US was to consider an extension of China goods tariff exclusions. Finally, 10yr JGBs were indecisive as initial pressure from the mostly constructive risk tone, was counterbalanced by this week’s support near the 152.00 level and with the BoJ present in the market for JPY 660bln of JGBs with 1yr-5yr maturities.

Top Asian News

  • Alibaba Replaces CEO of Southeast Asian Arm Lazada
  • Tokyo Inflation Stays Near Zero Even After Emergency Ends
  • China-India Tensions Continue Despite Pledge to Disengage
  • Jakarta Subway Operator Mulls Bond Sale to Expand Network

European equities trade firmer (Eurostoxx 50 +1.4%), after a somewhat choppy start to the day which has seen them trade in negative territory before receiving more of a grinding bid ahead of the US’ entrance; with US futures flat/mixed but moving similarly higher. Stocks have been relatively resilient despite the mounting COVID-19 concerns stateside which has seen Florida and Texas pause their reopening efforts, with ICU’s in the latter state having reached maximum capacity. Furthermore, weakness in the banking sector (US banks were seen lower in after-hours trade) stemming from the latest Fed stress test results has failed to provide any sway on the broader tape thus far with financials in Europe currently the only sector in the red. As a reminder, the Fed capped dividend payments and banned share repurchases in Q3 for 34 of the largest banks. From a sectoral standpoint, positivity at the open was largely seen in the travel & leisure sector with Air France (opened higher by around 9.6%) leading the charge after the French and Dutch governments struck a EUR 3.4bln agreement to bail the Co. out. Furthermore, IAG (+2.2%) shares have also seen support after the Co.’s British Airways unit offered pay rises for some cabin crew members. However, as gains in European indices were trimmed, other travel & leisure names succumbed to the pressure and as such, the sector is trading broadly inline with its peers. Elsewhere, sectors are relatively mixed with price action in some areas lead by stock-specific developments. Notably, it has been another session of heavy losses for Wirecard (-48%) amid reports that Visa & Mastercard are considering withdrawing Wirecard’s ability to process payments on their network. Elsewhere to the downside, shares in Intu Properties (-54%) have been crushed this morning after the Co. noted that insufficient alignment has been achieved with creditors, as such and in order to protect stakeholder interests, they are now likely to involve the appointment of administrators. Finally, in the retail space, H&M shares are lower this morning after posting a SEK 6.48bln pretax losses in the three months through May and as such are laying the groundwork to issue fresh debt to help shore the Co.’s finances up.

Top European News

  • Lufthansa Faces Arduous Climb Out of Crisis After Bailout Sealed
  • Lessons From the Pandemic Add Urgency to ECB’s Focus on Climate
  • U.K. Mall Landlord Intu Likely to File For Administration
  • ECB’s Lagarde Warns of Complicated, Transformational Recovery

In FX, the broader Dollar and index remain within a tight range early-doors as the latter stays afloat above 97.000, albeit off best levels (97.482), having dipped from yesterday’s high 97.600 high and below the 97.500 mark. Looking ahead, today’s data docket sees US personal income, PCE & core PCE price index, Uni. of Michigan (F).

  • EUR - The European outperformer having had kicked off the final trading day of the week with a string of early-morning ECB speakers including Holzmann who downplayed the use of the deposit rate as an instrument, while president Lagarde remarked the economy is possibly past the COVID-19 trough, albeit this was accompanied with a second outbreak caveat. The president, alongside Governing Council member Rehn, also reaffirmed using instruments in a way which provides the most proportional response. However, Lagarde did express caution over a Recovery Fund deal reached at the mid-July summit – sentiment that has been expressed by some members of the Frugal Four. From a technical standpoint, EUR/USD’s 50 DMA has now risen above its 200 DMA, marking a golden cross which is typically perceived as a bullish signal. EUR/USD resides around 1.1225 having recovered from its earlier 1.1203 low, with a sizeable EUR 2.2bln of options expiring at the round figure at the NY cut.
  • NZD - Continued consolidation seen in the Kiwi from post-RBNZ lows of ~0.6400, with an added tailwind after the NZ treasury and central bank reached a funding agreement to ensure central bank has adequate resources to meet increasing responsibilities. NZD/USD sees itself just under 0.6450 having found an intraday base at 0.6415, albeit still a way off its 100 WMA and current weekly high at 0.6522 and 0.6532 respectively.
  • JPY, CHF - Currently the top gainers among G10s as the risk tone further sours despite an absence of fresh fundamental catalysts thus far heading into the weekend. USD/JPY dipped and remains below the psychological 107.00 (coincides with 10 DMA) and yesterday’s 106.97 low from a high of 107.24. USD/CHF lingers sub-0.9500 with a current base at 0.9471 ahead of yesterday’s 0.9469 low.
  • GBP - Sterling remains subdued in early-trade, potentially more-so on the back of the firmer EUR as EUR/GBP hovers around 0.9050 having found support at its 10 DMA at 0.9015. UK specific newsflow has remained light ahead of post-Brexit trade talks next week, with little by way of fireworks expected between the sides. Elsewhere, the UK alongside some European countries offered to limit the scope of proposed digital tax following the US threat which could offer some solace in bilateral post-Brexit relations with Washington. Cable dipped below 1.2400 having had earlier tested the level to the downside.

In commodities, choppy trade in the crude complex once again amid quietened trade heading into the end of the week, with little by way of fresh fundamental newsflow to influence price action. WTI and Brent Aug futures have regained a firmer footing after the latter briefly dipped into negative terriroty in price action that coincided with that in stocks. WTI meanders around USD 39/bbl, having had found a current base at 38.63/bbl, while its Brent counterpart trades on either side of USD 40.50/bbl having touched a low print of USD 41.05/bbl. Looking ahead, traders will be, as usual, eyeing macro newflow in regard to the COVID-19 case count alongside potential US-China or geopolitical developments, whilst data docket sees the weekly Baker Hughes rig count. Spot gold remains within a contained USD 8/oz range around 1765/oz. Copper mimics price action across the equity-space.

US Event Calendar

  • 8:30am: Personal Income, est. -6.0%, prior 10.5%; Personal Spending, est. 9.2%, prior -13.6%
  • PCE Deflator MoM, est. 0.0%, prior -0.5%; PCE Core Deflator YoY, est. 0.9%, prior 1.0%
  • PCE Deflator YoY, est. 0.5%, prior 0.5%; PCE Core Deflator MoM, est. 0.0%, prior -0.4%
  • 10am: U. of Mich. Sentiment, est. 79.2, prior 78.9; Current Conditions, est. 88, prior 87.8; Expectations, est. 74, prior 73.1

DB's Jim Reid concludes the overnight wrap

Despite the latest virus stats making for more bleak reading, a late bounce into the close on Wall Street saw risk assets stage an impressive turnaround from the lows last night. We’ll get to that shortly but first to quickly recap the main headlines yesterday. In Texas the Governor halted the new phases of reopening the state’s economy as the number of cases rose by over 5000 for the fourth day in a row. It came as they also suspended elective surgery in the state’s biggest cities and headlines hit suggesting that Houston-area ICU wards were full. Meanwhile in Florida, case growth also continued to grow strongly, with a further 4.6% increase yesterday (vs. previous 7-day average of 4%). The recent outbreak in Florida has caused Apple to close an additional 14 stores in the state. This means the company has closed 32 stores in the past two weeks as cases have surged in the southern states. In total, the US added 39,596 new cases yesterday – a new daily high - and in percentage terms new cases grew by 1.7% which is the highest daily increase in 39 days.

That said, the news clearly wasn’t entirely negative, with the original epicentre of New York reporting that the number of virus hospitalisations was now below a thousand for the first time since March 18th. New York City is set to enter “phase 3” of reopening on July 6th, including in-door dining and personal-care services, as well as access to basketball and tennis courts, though capacity will continue to be limited.

However, the real catalyst for the late rally yesterday came in the last hour after the CEOs of Houston area hospitals tried to assure the public that the Texas Medical Centre had the required capacity to deal with the hospitalisations. When it was all said and done, the S&P 500 ended the session up +1.10%, a reversal of 1.97% from the lows. That does mask what was actually a fairly calm session for the most part. In fact after recovering from an early dip about half an hour into trading, the index traded in just a 26pt range for the majority of the session, until the surge at the close. That tight range was less than half the average daily range over the last month (54pts) for the S&P. The index was already recovering slightly before the headline, helped primarily by a strong performance for bank stocks (+3.57%) – the best industry performing industry group in the S&P yesterday.

The move higher in bank stocks came after the Fed, the Office of the Comptroller of the Currency, and the FDIC approved changes to the Volcker Rule. The rule changes will allow lenders to increase their business with certain funds, including venture capital funds. Regulators also amended a requirement that lenders had to hold margin when trading derivatives with their affiliates, and this reversal could free up an estimated $40 billion for US banks. However, regulators have added a new threshold, which limits the scale of margin that could be forgiven. This was followed by the stress test results after the NY close which included the Fed telling the major US banks that dividends would be capped at second quarter levels and buybacks would be not be allowed through at least Q3.

It was a similar story for the other US indices, with the NASDAQ (+1.09%) and the Dow Jones +1.18%) also seeing late surges. Europe was slightly weaker, with the STOXX 600 up +0.72% as bourses moved higher across the continent. Similar to the US, European Financial Services (+2.24%) and Banks (+1.58%) were among the best performing sectors. Wirecard was once again the worst performer on the STOXX 600, falling by a further -74.90% yesterday after the company filed for insolvency.

The momentum has continued in Asia this morning with the Nikkei (+1.12%), Kospi (+1.06%) and ASX (+0.91%) all up. The Hang Seng is trading down -0.55% having reopened following a holiday while Chinese markets remain closed. Futures on the S&P 500 are flat, as are bond markets. Elsewhere, WTI and Brent oil prices are up around 1% following news that Russia slashed exports of its flagship crude Urals to the lowest in at least 10 years.

In terms of overnight news, the US senate has approved a bipartisan measure that would penalize banks doing business with Chinese officials involved in the national security law that China is seeking to impose on Hong Kong. The bill would require the State Department to report to Congress every year about officials who seek to undermine the “one country, two systems” model that applies to Hong Kong. It gives the President the power to seize the assets of and block entry to the US for those individuals. A companion bill has already been introduced in the House of Representatives for its approval.

Back to yesterday, and markets didn’t appear to be too fussed by the latest weekly initial jobless claims numbers in the US, which for the 2nd week running came in worse than expected. Looking at the detail, there were 1.48m initial claims in the week through June 20th (vs. 1.32m expected), while the previous week’s reading was revised up by +32k. Although that’s now the 12th consecutive week of declining claims from the peak in late March, the last 2 weeks have seen the numbers fall by just -60k this week and -26k the week before, which is a big change from the previous 10 weeks where even the smallest decline was over -200k. The number of continuing claims for the week ending June 13th were somewhat better however, falling to 19.522m (vs. 20m expected), and the insured unemployment rate fell half a point to 13.4%.

Core sovereign bonds were slightly mixed amidst the abrupt turn in sentiment, with yields on 10yr Treasuries (+0.7bps) higher while bunds (-2.8bps) fell. UK gilts outperformed in particular, and yields on the country’s 2yr debt closed at a record low of -0.08%. 10yr gilts similarly closed at a record low of 0.15%, though this was still above their low of 0.075% on an intra-day basis back in March.

In other news, though it was some way down the headlines, the ECB released the minutes from their June meeting yesterday, when they announced an expansion of their Pandemic Emergency Purchase Programme (PEPP) by €600bn. Perhaps the most important aspect was the discussion on the proportionality of the PEPP, as well as the monetary stance more broadly. Bear in mind that one of the German Constitutional Court’s requirements in their ruling was for the ECB to decide on the proportionality of their asset purchase programme. In the minutes, a notable passage was that “there was broad agreement among members that while different weights might be attached to the benefits and side effects of asset purchases, the negative side effects had so far been clearly outweighed by the positive effects of asset purchases on the economy in the pursuit of price stability.”

Elsewhere, ahead of next week’s round of Brexit negotiations in Brussels, we got some interesting comments on Twitter from the UK’s chief negotiator, David Frost. The most notable was that he said “the Government will not agree to ideas like the one currently circulating giving the EU a new right to retaliate with tariffs if we chose to make laws suiting our interests. We could not leave ourselves open to such unforeseeable economic risk.” This is interesting since the possibility of the UK diverging from the level playing field in return for the EU having the right to respond with tariffs had been floated as a possible compromise recently. Following little progress in the negotiations so far, the plan is now for negotiations to take place every week over the next five weeks.

Finally, yesterday’s other data included the preliminary durable goods orders from the US for May. That saw a higher-than-expected increase of +15.8% (vs. +10.5% expected). Meanwhile the Kansas City Fed’s manufacturing index rose to 1 (vs. -1 expected).

To the day ahead now, and the data highlights include French consumer confidence for June, Euro Area M3 money supply for May, and Italian economic sentiment for June. Over in the US, there’ll also be personal income and personal spending for May, along with May’s PCE core deflator and the final University of Michigan sentiment indicator for June.

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Spread & Containment

Disney World brings back fan favorite transportation choice

Not every major company has done the same thing (we’re looking at you, Starbucks).



Before the covid pandemic, Starbucks (SBUX) - Get Free Report offered self-service stations for milk, cream and sometimes various alternatives. 

That went away during the pandemic because customers did not like the idea of touching a dispenser that another person had just touched. Never mind the shared counters drinks were placed on, the napkin and straw dispensers that everyone touched — pouring your own milk or cream came with an enhanced risk of illness.

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In reality, maintaining milk stations — sometimes more than one in each store — cost the chain a lot of money. Keeping the dispensers filled was labor intensive and customers got mad when one was empty. And people likely used or wasted more milk and cream compared with the current policy, where those are kept behind the counter. 

Starbucks made the change at a time when companies could do anything if they used "public safety" as the reason. Some of those changes, however, were not reversed once the impact of covid lessened and most of society returned to normal 

Walt Disney (DIS) - Get Free Report, for example, got rid of parking trams at Disney World. That made sense since the trams were not built for social distancing and smaller crowds meant shorter walks to the parks.

In September Disney fully restored that service, which surprised some park visitors. Now, the theme park giant has brought back another transportation option that some thought might be gone for good. 

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Disney fully restored its parking lot trams in September.

Roberto Machado Noa/LightRocket via Getty Images

Disney World improves transportation

Disney World's massive property creates unique transportation challenges. Magic Kingdom, for example, is not within walking distance from its de facto parking lot, the Ticket & Transportation Center.

To get people to its signature theme park, the company offers its famed monorail and a ferry boat service. You can also ride the monorail to Epcot, between the Magic Kingdom and Epcot, and to the Contemporary, Grand Floridian, and Polynesian Resorts.   

READY TO BOOK YOUR DISNEY DREAM VACATION? Our travel partners can help.

Disney World also offers a boat service between Epcot and Hollywood Studios. In 2019, the company added Skyliner, a gondola service that connects the Pop Century, Art of Animation, Caribbean Beach, and Riviera Resorts with Epcot's International Gateway and with Hollywood Studios.

Adding Skyliner made staying at the theme park's value resorts, Pop Century and Art of Animation, a lot easier. Those properties used to be served with buses, which were often stressed during peak times.

Skyliner, which is open air, did not close during the covid period, aside from areas where properties it connects were closed. 

The service has been popular as it has made it faster to get between parts of the massive theme park in a way that, like the monorail, feels like a ride, not simply transportation. 

Disney brings back a popular transportation choice

Disney World's size means that no one transportation solution will work.

The company has brought back another — one that many thought might be a permanent covid casualty. The theme park company disclosed the move on its Walt Disney World Cast and Community Facebook page.

"Guests at Walt Disney World will once again be able to sail across Bay Lake between Disney’s Contemporary Resort, Disney’s Wilderness Lodge, and Disney’s Fort Wilderness Resort & Campground. Marked with its signature blue flag, the watercraft 'blue route' will return for afternoon and evening voyages beginning Oct. 1, making it even easier to grab a bite to eat at neighboring resorts."

That was met with excitement from followers of the page.

DISNEY WORLD DEALS: Make your Disney World, Disneyland, or Universal Studios dream a reality

"I had almost given up hope on this completely! I am so happy to see this service return," Denis Iverson McGilvery wrote.

That was the general sentiment shared by hundreds of followers, while a few hoped for even more returns to service.

"This is great news! Hoping to see the second launch at Disney Springs open up soon as well," Elizabeth Kelley added.

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Spread & Containment

Working with Communities: The Importance of Partnerships in Our Industry’s Success

NAIOP’s 2023 chair talks about four topics that often arise during his visits to chapters across North America: community relations, e-commerce, EV trends…



Since assuming the position of NAIOP chair in January, I’ve had the pleasure of visiting chapters from Orlando to Milwaukee to SoCal, talking with thousands of members about current market conditions, the forces impacting our industry, and our future as an organization. Four topics have frequently arisen during these conversations, regardless of chapter location or size. These include:  

1. Community Relations. In today’s environment, it’s essential that developers fully understand the impact of their product type on the communities in which they operate, particularly regarding the types of jobs, hours of operations and the environmental impacts of their project (traffic, water, energy, etc.). Whether developing in South Florida, New Jersey, Chicago or Los Angeles, our chapters report increased anti-growth sentiment and the importance of engaging with the community early and often.

2. E-commerce’s Role: Facility Demand and Data. E-commerce sales as a percentage of total retail sales were on a growth trajectory before the pandemic, turbocharging the industrial sector. While truck traffic associated with home deliveries has received attention from news organizations, non-governmental organizations and policymakers alike, consumer behavior as the driving force is often ignored. Further, some research suggests that ordering goods for delivery is better for the environment because people make fewer individual trips to malls, grocery stores and other local shops. Comprehensive research about e-commerce’s environmental footprint is needed to help educate our external audiences and debunk common misconceptions.

Regardless, developers need to clearly articulate e-commerce’s economic impact and the role industrial real estate plays in the community. For that sector – one I’ve been part of for four decades – it means helping policymakers, community groups, the media and the public understand that a) consumers are choosing e-commerce, which requires three times the amount of logistics space; and b) e-commerce can be a more sustainable option compared to traditional brick and mortar. In addition to the economic growth case, it’s important to explain our role as real estate developers in helping their community run smoothly and durably. We should partner with communities to underscore the importance our properties have in the ability to deliver essential goods, including baby formula, medicine, clothing and food.

3. EV Trends. In response to growing truck traffic and climate change concerns, many communities – typically on the West and East Coasts – are imposing requirements around the electrification of commercial vehicles. Southern California leads the pack.

Two years ago, Southern California’s local air quality regulatory body approved the unprecedented Indirect Source Rule (ISR), which required warehouse occupiers to quantify and report vehicle trips to and from warehouses to identify impact and be the basis for issuing taxes. Because of this, and in addition to new laws around electric vehicles at the state level, California businesses are investing heavily in electric trucks and vans and the infrastructure needed to support them.

Members from NAIOP’s California chapters, comprising the NAIOP California State Council, continue to experience the evolving spread of the ISR throughout the state. We also see other states looking at adopting similar “indirect source” concepts, including New Jersey, New York, Washington, Colorado and Nevada. NAIOP will continue to track and provide updates on this issue, as members in urban areas will no doubt keep seeing this policy impacting development projects.  

4. Designing Policies with Communities. We have seen an increase in antiwarehouse development sentiment. Some communities have used moratoriums to pause new projects in response to community pushback, typically on environmental impact grounds. NAIOP and other business associations continue to make the case that such moratoriums disrupt the supply chain, hamstring businesses from operating efficiently, and create job and economic losses.

In some communities, NAIOP members have worked with city staff and the community to create good neighbor policy agreements. These volunteer agreements can address issues like setbacks, landscape screening and noise abatement strategies. In some situations, these agreements can help speed up the entitlement process and create a positive relationship with the community. Developers have found that proactively incorporating neighborhood-friendly building features is a more effective approach than having aggressive approval conditions imposed upon their projects that impede functionality and are overwhelmingly expensive if legislated upon them.  

This year as NAIOP chair has been a meaningful one for me. As we begin the fourth quarter and the end of my term, I’ll continue to be steadfast in strengthening NAIOP and helping this organization and its members boldly talk about the value our industry brings to communities and the economy. I look forward to my remaining chapter visits and seeing many of you at CRE.Converge later this month in Seattle.

This piece has been adapted from the chair’s column in the fall issue of Development. Access the fall 2023 issue here.

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Options for Calculating Risk-Free Rates

One of the most fundamental concepts in finance is the notion of a risk-free rate. This interest rate tells us how much money investors are guaranteed…



One of the most fundamental concepts in finance is the notion of a risk-free rate. This interest rate tells us how much money investors are guaranteed to receive in the future by saving one dollar today. As a result, risk-free rates reflect investors’ preferences for payoffs in the future relative to the present. Yields on U.S. Treasury securities are generally viewed as a standard benchmark for the risk-free rate, but they may also feature a “convenience yield,” reflecting Treasuries’ special, money-like properties. In this post, we estimate a risk-free rate implicit in the prices of S&P 500 index options—called the box rate—to measure investors’ time preference separate from Treasury convenience yields.

Risk-Free Payoffs from Options

Options with a European-style expiration can be used to replicate a risk-free payoff using the put-call parity relationship. By buying a put option and selling a call option of the same strike price and maturity, an investor receives the strike price in exchange for delivering the underlying asset on which the option is written. By then selling a put option and buying a call option for a different strike price with the same maturity, an investor can construct a risk-free payoff equal to the difference in strike prices, as shown in the chart below. In industry jargon, this trade is sometimes called the box spread. The difference between the price of the box spread portfolio today and its payoff at maturity reveals a risk-free rate that we call the box rate—the rate at which investors can borrow or lend in the option market. Historical estimates of the box rate from a recent paper are available here.

The Box Spread Trade: Replicating Risk-Free Payoffs with Options

A Liberty Street Economics line chart replicating risk-free payoffs with options—the box spread trade—by plotting the combined payoff at maturity from purchasing a 95-strike call and selling a 95-strike put while also selling a 105-strike call and buying a 105-strike put.

Source: Authors’ calculation.
Notes: The chart plots the combined payoff at maturity (solid blue line) from purchasing a 95-strike call and selling a 95-strike put (squares) while also selling a 105-strike call and buying a 105-strike put (triangles). Regardless of the value of the underlying asset at maturity, the combined payoff is a constant value of $10, equal to the difference in the strike prices. This trade is known as the “box spread.”

Estimating Box Rates

We estimate box rates using S&P 500 index options (SPX options). SPX options are among the most liquid and heavily traded options in the world. They have a European-style expiration and long time-series of available historical data, serving as the basis for the Cboe Volatility Index (VIX Index).

The chart below presents an example of estimating box rates on March 15, 2022, the day before the Federal Open Market Committee (FOMC) began its most recent rate hiking cycle. The top panel estimates the one-year box rate from an ordinary least squares (OLS) regression that exploits put-call parity. The box rate implied by the slope coefficient is 1.59 percent. Since option markets are close to arbitrage-free because of the competitive forces in financial markets, put-call parity holds almost exactly. In this example, the R-squared is .99999992 out to seven nines and the standard error of the box rate estimate is less than .01 percent, or one basis point.

The bottom panel extends the analysis to multiple maturities. The box rates and Treasury yield curve have a similar upward slope. The convenience yield, which is the spread between these curves, ranges from 10 to 30 basis points across different maturities.

Example of Estimating the Box Rate

Two-panel Liberty Street Economics line chart estimating box rates on March 15, 2022, the day before the FOMC began its most recent rate hiking cycle. The top panel estimates the one-year box rate from an ordinary least squares (OLS) regression that exploits put-call parity, while the bottom panel extends the analysis to multiple maturities.

Sources: OptionMetrics; Federal Reserve Board.
Notes: The top panel plots put minus call mid-quote prices for the same strike price and maturity on March 15, 2022, alongside fitted values from an ordinary least squares (OLS) regression. The box rate implied by the slope coefficient from the regression is 1.59 percent for a maturity in 367 calendar days on March 17, 2023. The bottom panel plots the term structure of box rates from index options of different maturities alongside estimates of Treasury rates from a smoothed yield curve found here. All rates are zero-coupon discount rates with continuous compounding. Years-to-maturity is actual calendar days divided by 365. The option data is from OptionMetrics for S&P 500 index options with maturities between one month and five years whose bid quotes are greater than zero.

Box Rates and Treasury Convenience Yields over Time

Analyzing box rates and Treasury yields over time, we find three main results. First, from January 1996 to April 2023, the box rate is 35 basis points above the Treasury rate on average, implying a 35 basis point convenience yield. Second, convenience yields grow dramatically during the financial crisis of 2007-09, reaching a peak of roughly      130 basis points in October 2008 as a one-month moving average. Third, the average term structure of convenience yields is almost flat across maturities out to three years. 

The chart below illustrates the first two results. The top panel plots the time series of the one-year box rate and Treasury rate over time. The bottom panel plots the convenience yield, which equals the difference between the two rates. Box rates and Treasury rates closely comove, with the Treasury rate consistently below the box rate throughout the sample. In addition to being consistently positive, the convenience yield also exhibits some time-series variation, spiking most significantly during the 2007-09 financial crisis, while staying at more stable levels between 20 and 40 basis points in recent years.

Box Rate Closely Tracks the Treasury Rate and Implies a Positive Convenience Yield

Liberty Street Economics line chart plots the one-year box rate, Treasury rate, and convenience yield estimate from January 1996 through April 2023 as a twenty-one-day moving average across trading days. The top panel plots the time-series of the one-year box rate and Treasury rate (in percentage terms), while the bottom panel plots the convenience yield (in basis points).

Sources: OptionMetrics; Federal Reserve Board.
Notes: The chart plots the one-year box rate, Treasury rate, and convenience yield estimate from January 1996 through April 2023 as a twenty-one-day moving average across trading days. The box rate is estimated by ordinary least squares (OLS) from put-call parity. To obtain a constant one-year maturity, we linearly interpolate the nearest S&P 500 index option maturities whose put-call parity regressions have an R-squared of at least .99999 out to five nines. Treasury rates are from a smoothed yield curve to obtain a one-year, constant maturity, zero-coupon rate. Both rates are zero-coupon discount rates with continuous compounding. Results are similar using the Theil-Sen estimate of the box rate from the box spread trade.

The chart below illustrates our third result by plotting the average term structure of convenience yields. As we saw in the example above, box rates can be estimated for different index option maturities. We find that the average level of convenience yields is relatively stable and close to 35 basis points across maturities. This means that when the Treasury issues debt at any maturity out to three years, it tends to save around 35 basis points relative to the risk-free rates implicit in the option market.

Convenience Yield Term Structure Relatively Flat out to Three Years, 35 Basis Points on Average

Liberty Street Economics line chart plots the nonparametric binned regression of convenience yield (in basis points) onto time-to-maturity using the binsreg package to show the average term structure of convenience yields is almost flat across maturities out to three years.

Sources: OptionMetrics; Federal Reserve Board.
Notes: The chart plots the nonparametric binned regression of convenience yield onto time-to-maturity using the binsreg package. It reports a 95 percent uniform confidence band and pointwise confidence bands after partitioning time-to-maturity into ten bins. We use a binned regression approach to account for the fact that option maturities are fixed in calendar time and are not constant maturity. The regression includes maturities from six months to three years. The sample period is January 1996 to April 2023.

Interpretation and Applications

Treasuries are generally considered to be one of the most liquid securities in the world, as they can be traded quickly, in large scale, and at low cost. Treasuries are also a common form of collateral that play a unique role in regulatory capital and liquidity constraints. Because options are risky financial derivatives, the box rate is an alternative risk-free rate benchmark that is based on option prices that do not embed a safe asset premium. Note that the recent effort to replace LIBOR with a new benchmark interest rate shows the importance of finding risk-free rate alternatives. The box rate, which is based on market prices, is one candidate that may be considered alongside other robust reference rates such as SOFR (Secured Overnight Financing Rate) to support financial stability.

The convenience yield estimated with the box rate is also a potentially useful barometer for stress in the financial system. It measures how much investors are willing to pay to hold Treasury securities instead of less money-like assets with identical cashflows. In historical data, the convenience yield was largest during the financial crisis of 2007-09. Investors and policymakers who want a real-time measure of the scarcity of safe assets may therefore find convenience yields based on box rates useful.

Economic Magnitude of Treasury Convenience Yield

As a back-of-the-envelope approximation, if we apply the one-year convenience yield estimated with the box rate to the amount of Treasury marketable debt outstanding each year, the Treasury convenience yield has saved taxpayers around $35 billion per year over the past twenty years. Given the increase in debt following the    COVID-19 crisis, this amount has increased to $70 billion per year since 2020. These significant taxpayer savings bring into focus the importance of suggested reforms and recent research on the Treasury market, where improving the resiliency and functioning of the Treasury market may help to maintain Treasuries’ convenience yield.

Jules H. van Binsbergen is the Nippon Life Professor in Finance at the Wharton School of the University of Pennsylvania.

William Diamond is an assistant professor of finance at the Wharton School of the University of Pennsylvania.

Peter Van Tassel is a financial research economist in Capital Markets Studies in the Federal Reserve Bank of New York’s Research and Statistics Group. 

How to cite this post:
Jules van Binsbergen, William Diamond, and Peter Van Tassel, “Options for Calculating Risk-Free Rates,” Federal Reserve Bank of New York Liberty Street Economics, October 2, 2023,

The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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