Feb 22. Yields are going the way of lumber : higher

–New high yields across the curve yesterday.  Ten year yield rose 4.8 bps to 293.9.  At futures settlement I marked the bond at 322.1, essentially right at the high yield mark of last year in March. Curve was marginally steeper; red/gold pack spread gained 0.625 bp.  On the dollar curve there were new high settlements made in a couple of one-year spreads, but interestingly they are slightly further back; EDU8/U9 settled 42.5 and EDZ8/Z9 37.0, both +2 on the day.  The peak spread is still EDH8/H9 which settled 53.75 only +0.75.  The extreme selling pressure on the front end of the curve is preventing near spreads from making new highs.  I mentioned yesterday the idea of buying EDJ (April) 9775 straddle for 8.5 which has EDM8 as the underlying.  Interesting to note that EDH8 9787^ settled 7.25.  In this environment I’d pay an extra 1.5 bps for the extra 25 days…

–Heavy buy of FFJ8 at 9834.5 to 9835.0.  Feb is 9858.25, so an avg price of 9834.75 is a spread of 23.5… it appears someone is paying 1.5 bps of protection against a stock crash that might take a March hike off the table.  Open int in the April contract +44k.  If FFG8 is 9858.25, then TWO hikes by June would indicate 9808.25 and July FF settled 9814.5.  So the market is getting pretty comfortable with 2 hikes in H1, while a spread like EDM8/EDZ8 only trades 26, and July/Jan FF 27.5.  So only 1 hike for H2?

–Off topic perhaps, but March Lumber closed at new record highs, 526.0.  This contract has surged from 410 to 526 since December, up 28%.  I’m sure there are specific reasons (perhaps it has to do with trade policies, which seem a bit more fluid these days), but in the big picture, price surges may not be so uncommon anymore.

–Late in the day there was a buyer of about 25k 3EH 9700p for 10 ref EDH21 9697.5.  The straddle, which settled 16.5, went to a solid 17.5 bid.  I would note that the underlying contract traded 9705 just after the FOMC minutes and fell 8 bps into the end of the day.  Vol in general has been muted over the past week, but the market is becoming a lot looser.  Treasuries are getting toward target or resistance levels; as mentioned above bonds equaled last year’s high yield and tens are nearing 3%.  This morning treasuries have rebounded slightly….however, that’s no reason to sell vol in my opinion.

–News today includes Leading Indicators expected +0.6.  Dudley speaks.  7 year auction.

Posted on February 22, 2018 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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