Feb 27. Market is squeezing out even ‘gradual’ hikes

–Yields little change this morning after a strong rally in interest rate futures on Friday.  The ten year fell 7 bps to 231.5.  The eurodollar curve flattened with all near spreads posted new recent lows.  For example, EDM17/EDM18 dropped 4 bps to just 46.  EDM17/EDU17 fell 1.5 to 11.5.  Red/gold (2nd to 5th year) euro$ pack spread fell 3.75 bps to just over 74 bps.  The German Schatz (2yr) has had a blistering rally, with Friday’s yield at -95 bps.  While there was surprising selling pressure in Fed Funds on Friday (with March and April settling at just over 30% odds for a hike at the March FOMC), the market is generally squeezing out expectations for aggressive action from the Fed.  Thoughts of three hikes this year are evaporating.  International headwinds will likely keep the Fed sidelined until June; Yellen speaks on Friday and undoubtedly will mention non-domestic challenges.

–There’s an interesting story on ZH this morning about Target 2 imbalances between southern and northern countries, namely Italy and Germany.  http://www.zerohedge.com/news/2017-02-26/european-debt-bomb-fuse-lit-target2-imbalances-hit-crisis-levels

I would also note that Germany’s deputy finance minister ruled out haircuts on Greek loans.  When is an asset, (an IOU) not really an asset?  Sort of like the $1 trillion (over 5% of GDP) that the US carries on the books in student loan debt.

–Implied vol in treasuries remains firm with upside potential.  Today’s news includes Durables, expected +1.8.

 

Posted on February 27, 2017 at 5:28 am by alexmanzara · Permalink
In: Eurodollar Options

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