March 19. Speculation increasing about discount rate hike

Several stories circulated yesterday about the Fed raising the discount rate again (as early as yesterday afternnon, which obviously didn’t occur). From Bloomberg:  “There has been no decline in borrowings [from the discount window] since the discount-rate increase, which is why it is entirely possible they want to raise the discount rate in the days ahead,” Crandall said. “Their stated rationale for raising the rate was to turn it into what it used to be: a liquidity backstop instead of a primary source of funding.”  This story, along with another jump in Greek CDS, caused pressure on the front end of the eurodollar curve.  2/10 treasury spread notched a slight new low at 271.

–Option volume was very heavy, mostly consisting of selling near calls and buying call spreads in red midcurves.  Probably 100k midcurve Sept and Dec call spreads were bought.EOU 9825/9850 cs, EOZ 9812/9837cs.

–While interest rate futures closed lower across the board, one year calendar spreads (fronts vs reds) were mostly lower.  For example, EDZ10/Z11 sprd fell 3.5 bps to 141, not a particularly bearish signal.  If the market believed in the idea of a sustained tightening campaign these spreads would explode higher. However, a sentiment shift reflecting tighter conditions for short term funding has clearly occurred. 

–Obama’s “Job disapproval rating tops approvals for the first time”.

Posted on March 21, 2010 at 2:26 pm by alexmanzara · Permalink
In: Eurodollar Options

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