July 22. CANDY (front end euro$ contracts) CRUSH

–Although net changes in interest rate futures weren’t particularly large, there is quite a bit of roiling just below the surface.  The ten year yield eased 1.5 bps to 156.3.  The big change is weakness in the front end of the eurodollar curve, brought on in part by regulatory changes for institutional money market accounts.  The first four euro$ contracts (whites) were down an average of 1.75 bps, while reds were -0.875 and greens were unchanged.  There was significant put activity in front contracts, with large buying in EDU6 9912p (volume 150k and OI -27k), and in EDZ6 9900/9887ps, with 100k bought for 2.25. According to prelim OI sheets, the 9900p fell 30k and 9887p gained 51k.  Futures open interest was down in both EDU6 and EDZ6, by 25k and 30k.  The conclusion is not so much that the Fed is on the cusp of a hike, but that the front end is having what is probably a one-off adjustment reflecting a higher risk premium.  Indeed, implied volatility strengthened in dollars but was essentially unchanged in treasuries.  EDZ6 9912^ was 16.0 on Wednesday but closed 17 yesterday.  This increase in risk was also clearly on display in swap spreads, for example, the 2yr swap spread was up 4.2 bps late in the day at 26.5, having been around 16.4 in the middle of last week.  In another example, EDH7 was -1.5 on the day, while Jan, Feb and March FF contracts were all +0.5.

–Because of weakness in the front, the euro$ curve flattened, with the red/gold pack spread at 48.5, near the absolute low for the move of 47.25.  Near one-yr eurodollar calendar spreads fell, with Dec’16/Dec’17 down 1 to 17.0.

–Crude oil settled at its lowest level in three months, with CLU6 down $1/bbl to 44.75, on inventory and supply concerns.  One of the underlying themes regarding the ‘reflation’ story was the recovery in oil prices, however, CLU6 has fallen nearly 15% from its high settlement of 52.31 in early June.  And I may as well mention the gut wrenching declines in Corn and Wheat, with CZ6 at a new low this morning of 338 1/2, down 25% from June’s high, and Wheat down over 20% from the high.

–Draghi yesterday mentioned the importance of Europe’s banks as a transmission linkage for monetary policy, and is obviously wrestling with the non-performing loan situation, with no clear solutions.  The euro currency future tested 110.00, but inexplicably (to me anyway) held that level and is slightly higher this morning at 110.50.  US news today includes Markit Mfg PMI expected 51.5 from 51.3.  AUGUST treasury options expire today.

Posted on July 22, 2016 at 5:12 am by alexmanzara · Permalink
In: Eurodollar Options

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