THE WALL STREET JOURNAL. Friday, February 28, 2020 |B11
Investors are shunning Ital-
ian government bonds after
the country became Europe’s
epicenter for the coronavirus
outbreak this week, leading to
renewed worries about one of
the region’s most indebted
economies.
Yields on the country’s 10-
year bonds rose, while those
on German and French debt
slid, signaling that fixed-in-
come investors in Europe are
pulling out of Italian sovereign
debt and heading instead for
the safety offered by less in-
debted economies. The week
has also seen a sharp selloff in
equities and other risky assets
globally because of fears about
how growth might suffer dur-
ing a prolonged outbreak.
Investors tend to rush to
the safety of governmentAUCTION RESULTS
Hereare the results ofThursday's Treasuryauctions.
All bidsare awarded ata singleprice atthe market-
clearingyield.Ratesaredeterminedbythedifference
between thatprice and the facevalue.
FOUR-WEEK BILLS
Applications $129,903,628,200
Accepted bids $50,540,888,200
" noncompetitively $1,594,846,000
" foreign noncompetitively $1,000,000,000
Auction price (rate) 99.881000
(1.530%)
Coupon equivalent 1.553%
Bids at clearing yield accepted 12.53%
Cusip number 912796XD6
The bills, dated March 3, 2020, mature on March 31,
2020.
EIGHT-WEEK BILLS
Applications $122,408,093,400
Accepted bids $45,486,901,900
" noncompetitively $265,602,200
" foreign noncompetitively $1,000,000,000
Auction price (rate) 99.766667
(1.500%)
Coupon equivalent 1.524%
Bids at clearing yield accepted 53.89%
Cusip number 9127962D0
The bills, dated March 3, 2020, mature on April 28,
2020.
SEVEN-YEAR NOTES
Applications $84,413,393,300
Accepted bids $36,836,326,900
" noncompetitively $8,672,500
" foreign noncompetitively $0
Auction price (rate) 99.185208
(1.247%)
Interest rate 1.125%
Bids at clearing yield accepted 6.18%
Cusip number 912828ZB9
The notes, dated March 2, 2020, mature on Feb. 28,
2027.
turns during a period of ul-
tralow bond yields. The activ-
ity can help suppress market
swings, keeping stocks calm
for extended periods.
It can also have the opposite
effect, magnifying volatility
when it appears. That scenario
may have been on display this
week because of what is calledshort gamma positioning, in
which traders buy shares when
prices are rising and sell when
prices are falling.
Gamma measures how much
the price of an option acceler-
ates when the price of the un-
derlying security shifts. Track-
ing this exposure has become
more popular on Wall Street,lowing them to make more
money from dislocations in
stock prices. CME, Cboe and
Virtu “perversely benefit from
the market woes,” Piper Sandler
analysts said in a research note.
PIZZA NIGHT:
Most restaurant stocks have
fallen lately. Not Domino’s
PizzaInc. The pizza chain has
soared 17.1%, with much of the
gains coming after the com-
pany fended off competition
from rivals like UberEats and
DoorDash to post better-than-
expected earnings and revenue
on Feb. 20. Richard Allison,
chief of Domino’s, said he isn’t
concerned about the virus im-
pact. In fact, food-delivery ser-
vices have become lifelines for
people quarantined in China.
LOSERS
GOING OUT:
With the possibility that
more people will be staying
home, shares of companies that
offer a fun time out have
dropped more than the broader
market. Cinemark Holdings
Inc. has fallen 21.6% andDave
& Buster’s EntertainmentInc.
has shed 28%. Restaurant
shares have also declined:
Shake ShackInc. has dropped
19%, andBJ’s RestaurantsInc.
has swooned 26%.
TRAVELING:
Canceled your travel plans?
So have many others. Investors
have used the disruption as an
opportunity to bet against
shares of airlines, cruise com-
panies and resorts—all of
which have lagged behind the
broader market since reports of
the epidemic first began surfac-
ing.American Airlines Group
Inc. shares have sunk 27.3% and
Royal Caribbean CruisesLtd.
is down 30.6%.
ENERGY:
If travel is restricted, there
will be less demand for gaso-
line to drive cars and for fuel to
fly airplanes. That bodes poorly
for the energy sector. Shares of
oil-field services companies
HalliburtonCo. andSchlum-
berger Ltd. have declined
about 22% since Feb. 19.
Continued from page B1
Some Stocks
Emerge
As Winners
MARKETS
decline since August 2011.
Marko Kolanovic, global
head of quantitative and de-
rivatives strategy at JPMor-
gan Chase & Co., estimated
that more than $100 billion in
selling Monday and Tuesday
was fueled by options hedging
and trading strategies based
on market volatility. Mean-
while, liquidity—or the ability
to get in and out of posi-
tions—also worsened, Mr. Ko-
lanovic said, further stressing
the broader market.
To some investors, this high-
lights the increased influence
that options activity and differ-
ent trading tactics can have on
markets, as new strategies to
juice returns have surged in
popularity in recent years.
“It has been a big contribu-
tor to the increase in volatil-
ity,” said Vincent Cassot, head
of equity derivatives strategy
at Société Générale SA, of op-
tions positioning. “We can
switch quickly from a very low
volatility world.”
Options trading has
swelled, particularly as inves-
tors have gotten more creative
in their search for higher re-with some strategists saying
that it can fuel big moves—
higher or lower—in stocks.
“You just had the right
place, right time for a shock
down” this week, said Charlie
McElligott, a cross-asset
macro strategist at Nomura.
“The conditions were ripe be-
cause of gamma.”
Mr. McElligott wrote in a
note to clients Tuesday that
this dynamic added to the
stock swoon that day, as trad-
ers sold more stocks the lower
prices fell.
Data provider SqueezeMet-
rics estimates that tens of bil-
lions of dollars of S&P 500 fu-
tures had to be sold for every
percentage point the S&P 500
went down earlier week.
Here’s how it works: Inves-
tors often turn to the options
market to buy and sell con-
tracts tied to the S&P 500.
They can buy S&P 500 put op-
tions from options dealers, who
take the other side of the trade.
Such contracts tend to profit as
the stock gauge falls, and can
serve as a portfolio hedge.
As the S&P 500 declines,
those put options become moreprofitable for the investor who
purchased them. Meanwhile,
the trade sours for the seller.
Professional options dealers
try to maintain neutral posi-
tions in the market and remain
constantly hedged. As markets
fall, options dealers sell stocks
or stock futures to offset those
positions. The selling can in-
tensify the more stocks fall.
“You’re going to be a seller
when the market is down,”
said Mr. Cassot. “Hence they
are going to increase the vola-
tility of the market.”
An accelerating selloff and
rising stock volatility can trig-
ger other investors to make
similar decisions, creating a
ripple effect. A whole camp of
funds on Wall Street makes
trading decisions based on the
level of swings in markets.
They tend to sell when volatil-
ity rises and buy when volatil-
ity falls. One measure of stock
swings, the Cboe Volatility In-
dex, or VIX, on Monday
jumped to its highest level
since January 2019 and con-
tinued to rise the next day. It
closed Thursday at its highest
level since August 2015.The rapid spread of the cor-
onavirus outside China
spurred turmoil in financial
markets this week. Investors
say hedging activity by op-
tions traders might have made
it even worse.
Market volatility has roared
back, smashing a streak of
tranquility that helped pull
major U.S. stock indexes to re-
cords just days earlier. Waves
of selling dominated the week
and the S&P 500 closed down
Thursday more than 10% from
its recent high, a decline
known as a correction. The
selloff sent listed options ac-
tivity to the second-highest
level ever earlier this week.
There were technical fac-
tors at play, too. Derivatives
activity and heavy selling from
funds that tend to make knee-
jerk buying and selling deci-
sions based on the level of
market volatility created a
perfect storm for the Wall
Street selloff, analysts said.
TheS&P 500fell for the sixth
consecutive session Thursday,
logging its biggest percentage
BYGUNJANBANERJI
Invisible Forces Add to Market Swings
Volatilitysurgedthisweek,revealingthesideeffects
ofincreasedoptionstradinginrecentyears.Assets in mutual and
exchange-traded funds using
options-based strategies
$2505101520billion2010 ’15 ’20*
*Through January
Sources: FactSet (VIX); Morningstar Direct (assets)The Cboe Volatility Index
jumped to the highest
level since 2015 this week.
401015202530352019 ’20spreading not only fear but
oil-demand destruction and
horror thinking about poten-
tial demand destruction to
come,” Phil Flynn, senior mar-
ket analyst at the Price Fu-
tures Group, said in a note to
clients.
Oil-market traders are look-
ing ahead to a meeting of the
Organization of the Petroleum
Exporting Countries to see if
the cartel deepens output cutsto stabilize the market
The move is expected, but
some analysts question
whether even deeper supply
curbs will boost crude with
demand expected to fall sub-
stantially.
Hedge funds and other
speculative investors have cut
net bets on higher U.S. crude
prices, pushing them to a
nearly four-month low during
the week ended Feb. 18, Com-bonds when the world looks
riskier. But in southern Euro-
pean countries such as Italy,
Spain, Greece and Portugal, in-
vestor skittishness has tended
to infect sovereign-debt mar-
kets, too, in recent years. Since
the 2008 financial crisis and
the subsequent eurozone crisis
of 2011 and 2012, these coun-
tries’ high debt levels and
worse economic problems have
made them more susceptible
to selloffs.
Investors’ move from riskier
to safer government bonds has
sharply increased the extra
yield on Italian debt over Ger-
man debt. On Thursday, that
extra yield—or spread—on Ital-
ian 10-year bonds rose to 1.617
percentage points, which is up
from the recent low of 1.287
percentage points two weeks
ago, according to FactSet.
Part of this is German yields
falling as investors rushed forsafety as well as Italian yields
rising: German 10-year yields
slipped to minus 0.542% on
Thursday from minus 0.445%
at the end of last week. Italian
yields jumped to 1.075% from
0.896% in the same period.
However, that is still far be-
low the spread of more than 3
percentage points reached in
late 2018, when Italy’s govern-
ment was building up to a
showdown with the European
Union’s leadership over its
generous spending and bor-
rowing plans and fears rose
that it could ultimately leave
the eurozone.
Since then, the U.S. and Eu-
ropean central banks have been
forced back into interest-rate
cuts and government-bond
buying to support the economy
and relive financial strains.
Some analysts think the sell-
off in Italian bonds could be a
lot worse. The reason: Italianyields have been contained by
investors’ expectations that
any serious economic disrup-
tion would lead to an increase
in the European Central Bank’s
bond-buying program, which
was restarted late last year in
an effort to boost inflation.
Yields on Spanish and Portu-
guese bonds have also risen,
though much less than Italy’s,
while Greek bond yields have
jumped the most.
“If they think if the
eurozone is very weak—and It-
aly is a big part of that—the
ECB is going to have to act,
and one of the things they’re
going to do is buy the bonds,”
said Tom Kinmonth, senior
fixed-income strategist at ABN
Amro Bank NV.
Even though Italian bonds
are being sold down, in gen-
eral the market is still favoring
central-bank assets as the fast-
spreading epidemic leads toanxiety about economic
growth, said Alberto Gallo,
head of macro strategies at
fund manager Algebris.
“We know that this is going
to end up in fiscal and mone-
tary stimulus, so we are not
likely to bet against govern-
ment debt from here,” Mr.
Gallo said.
Italian government debt
could be among the biggest
beneficiaries of ECB efforts to
support the economy because
it owns a smaller share of the
country’s bonds than most,
which means it has room to
buy more Italian debt before
hitting limits.
Investors have grown jittery
as the coronavirus outbreak
has spread across Italy. By
Thursday, 528 people in the
country had contracted the vi-
rus, of whom 14 had died,
making Italy the biggest epi-
center outside Asia.BYAVANTIKACHILKOTI
ANDPAULJ.DAVIESInvestors Drop Italian Bonds, Seek German, French Debt
Thursday’s synchronous
slide came with stocks around
the world tumbling and ex-
tended a punishing stretch for
commodities sensitive to the
transportation and manufac-
turing sectors.
China is a source of demand
for the materials, so the early
year slump in economic activ-
ity in the country as a result
of the coronavirus has fueled
projections for lukewarm con-
sumption and excess supply.
More recently, the virus
spreading to many other parts
of the world has caused anxi-
ety about a larger-than-ex-
pected drop in global travel.
On Wednesday, a new case of
coronavirus was confirmed in
California that involved a per-
son who didn’t have a travel
history or exposure to another
person known to have the ill-
ness.
The rise of cases in coun-
tries from South Korea to Italy
has also fanned fears that the
ripple effects of the virus
could result in gluts for a
range of materials.
“The spread of the virus ismodity Futures Trading Com-
mission figures show. At the
same time, speculators have
ramped up net wagers on
lower copper prices.
Data for the week ended
Tuesday will be released on
Friday, with some analysts
noting that a reversal in spec-
ulative wagers has likely made
the slide in commodities even
more severe.
Elsewhere in commodities
Thursday, natural-gas futures
tumbled 4.6% to $1.752 a mil-
lion British thermal units,
closing at a nearly four-year
low, with traders expecting
mild winter temperatures and
steady production to result in
a glut of the heating fuel. The
coronavirus has also dented
demand for natural gas.
Front-month gold futures
erased an earlier advance,
ending the day down less than
0.1% at $1,640 a troy ounce.
Investors have generally fa-
vored the haven metal re-
cently, pushing prices to a
seven-year high on Monday,
though those prices fell on
Tuesday and Wednesday.Commodities from oil to
copper kept dropping Thurs-
day, continuing a recent slide
as traders expect the spread-
ing coronavirus to cripple de-
mand.
U.S. crude-oil futures slid
3.4% to $47.09 a barrel on the
New York
Mercantile
Exchange,
paring some of an earlier
drop, but still recording the
futures' lowest close since
January 2019. Prices are 29%
below a peak hit early this
year. Brent crude, the global
gauge of oil prices, closed
down 2.3% to $52.18 a barrel
on the Intercontinental Ex-
change.
Industrial metals also
dropped. Front-month copper
futures trimmed nearly all of
their Thursday loss, ending
the day down less than 0.1% at
$2.5715 a pound in New York.
Aluminum, zinc, tin and nickel
fell on the London Metal Ex-
change and extended recent
declines.BYAMRITHRAMKUMARPressure on Crude Oil and Metals Persists
Front-month copper futures trimmed nearly all of their Thursday loss, ending the day down less than 0.1% at $2.5715 a pound in New York.COMMODITIES
Commodity-price performance**Front-month futures10–25–20–15–10–505%Jan. Feb.Brent
–20.9%
YTDWTI
–22.9%
Jan. Feb.Gold
+7.9%
YTDCopper
–8.0%DONAT SOROKIN/TASS/ZUMA PRESS