Aug 13. Possible tipping point in long treasuries?

–Rates drifted slightly lower Friday and the curve edged flatter, with tens down 4.5 bps to 164.5. Economic news is light today, with PPI and Retail Sales Tuesday.
–Implied vol was hit. Notably there was a seller of about 6k Blue Sept (3EU) 9900^ from 19.5 to 18.0 (new position). On Thursday this straddle was more like 21, and he sold those too. There is an existing long position of 50k 3EU 9875/9850 and 9862/9850 put spread from 4.0 (long both) so if it is the same player the downside is protected.
–Though treasuries bounced from the worst levels of the week, price action is still suspect. We know that the Fed is the main buyer of long treasuries, and going into the election there probably isn’t the political will to announce a massive new QE. We’re losing the major buyer. At the same time, Draghi said his focus would be on the short end, and that he is concerned about the transmission mechanism. The monetary transmission mechanism is broken for a simple reason. It’s like taking a guy who’s been stranded in the desert and feeding him nothing but chocolate cake and wondering why he doesn’t look any better. Corn syrup monetary policy. I believe we’re at a point where the market could suddenly lose confidence in the long end of the US. And perhaps Romney’s choice of Paul Ryan as running mate will bring unsustainable US fiscal policy into sharper focus…possible tipping point?

Posted on August 13, 2012 at 6:44 am by alexmanzara · Permalink
In: Eurodollar Options

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