Nov 19. And….it’s gone!

–Five year note plunged 6 bps to 289.2 Friday, capping a week which saw extreme volatility in energy markets, uncertainty regarding Brexit, and continued stock volatility.  ZH notes that a firm named ‘OptionSellers.com’ was blown up by the nat gas move.  Yet another premium seller that got caught in a black swan event, which seems to be happening a bit more frequently, one might even say regularly.  One of the unintended effects of ZIRP was the reach for yield that heightened the popularity of option selling strategies as a way to corral a few extra bps of yield.  “Hold my beer and watch THIS! Ka-BOOM”  With the two year note over 2.75%, risk-free yields now provide solid competition for other investments, and at worst case are a safe haven that now pay you to wait for the smoke to clear.

–Ten year note fell 4.8 bps to 307.2.  It was the belly which led the curve to lower yields; on the eurodollar strip reds were the leader, closing +7.125.  Near eurodollar calendars made new lows.  EDZ8/EDZ9 closed 35, down 4.5 on the day to a new low, and EDH9/EDH0 fell to 24.5, just under 1/4%.  In early October Dec/Dec was near 60 bps, so the trajectory of Fed hikes has clearly flattened.  Fed Vice Chair Clarida’s interview on CNBC further solidified that point, as he shifted the Fed’s focus from normalization to ‘data-dependency’ and acknowledged slower global growth.  The idea of quarterly hikes after December should be thrown out the window.

–Economic releases this week are light, but going into the end of the month larger events are looming.  After this weekend’s APEC non-agreement, hopes for a Xi-Trump G20 break-through are likely dashed.  Brexit and the Italian budget process are also on the docket.

Posted on November 19, 2018 at 7:42 am by alexmanzara · Permalink
In: Eurodollar Options

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