Feb 17. Is March live? (or is it memorex)

–Yesterday reversed recent trends; the 5 year yield led the way lower, dropping 6.2 bps to 193.8, while tens fell 5.3 to 244.7 and bonds 4 to 305.  There was a decent amount of put liquidation in dollars, for example, EDZ7 9825/9800 put spread sold at 4.5 in about 50k over the past two sessions, and 0EH 9825p were sold at 2.5 in equal size.  There were also large exits of option steepeners (buying back 0EH 9837p and selling 2EH 9800p and 3EH 9762p), contributing to a slight flattening of the front end of the curve. Odds of a March hike declined in spite of Lockhart saying it’s live, with March and April funds around 28%.  Many front month puts will cease to have value if the Fed doesn’t move in March; the market will become more confident of a 2 hike scenario for 2017.  For example. EDU7 9825p settled 0.75.  The Fed would have to hike three times to hit strike.  EDU7 9837p settled 2.5.  Again, without a move in March, it’s hold on life is tenuous.  My personal opinion is that the Fed should move, both for reasons of potential inflation and to quell excessive speculation, however, Yellen’s recent ‘run hot’ comment is sticking in my mind.

–In any case, what we saw is more modest bearish plays further out the curve.  For example, Short April and Short May (both based on EDM8, 9819.5s) 9800/9787.5 p spreads AND Green April and May (based on EDM9 9782.0) 9750/9737.5 p spreads were bought as a strip for 8-8.5 bps in 50k.  Settles in shorts 1.5 and 2.25 and greens 1.25 and 2.0 so strip settled 7.0.  The point is, these are all 12.5 wide for low premium, and even without a March move, have a chance due to possible curve moves.

–One final technical note: Yellen will be giving a speech in Chicago on March 3, the first Friday of the month, which ordinarily coincides with the Employment report.  However, the march jobs number release is the following Friday, March 10.  Timing is somewhat interesting as March midcurves expire on employment day; Yellen will have an(other) opportunity to solidify a March hike or tiptoe around the subject on March 3.

Posted on February 17, 2017 at 5:32 am by alexmanzara · Permalink
In: Eurodollar Options

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