Sept 15, 2014. The soft underbelly of central bank “control” is about to be exposed

–It was a fairly big day Friday as the back end of the US treasury curve slid to new lows.  US 30 year bond rose nearly 10 bps in yield to end near 335.  The five year note jumped over 3.5 bps to close at 181.5.  This was the highest close in fives in over a year; it was almost exactly a year ago at the September 2013 employment report when the 5 yr yield hit 185.   This year it has been in a range from around 145 to 180.  There was heavy buying of Blue October 9675 puts for 3.0 (settled 3.0 ref 9704.5, 18 delta).  There was also a large 100k trade synthetic long EDZ5/EDZ6 spread, selling 0EX 85/87ps to buy 2EX 73/76 ps for 1.5 debit.  Nearly all Eurodollar calendars made new highs.  EDZ15/EDZ16 has been the peak one year spread for some time, and rose 2 bps to 109.5 to a new recent high.
–This is, of course, a heavy news week with the Fed meeting and the Scottish vote for independence.  However, the bigger picture seems to be a global change in perception with respect to a low volatility environment.  Certainly the fx arena has seen some major break outs and a surge in volatility. As examples, $/yen has jumped from 102 to 107 in a month.  Aussie is making a new low as of Sunday evening, having plunged from over 93 to 89.50 this month. And now US interest rates have become somewhat unsettled in front of anticipated changes in the Fed’s posture.  Implied vol in treasuries was much firmer, with fives at 3.2, the highest since early June.  And there was even a large buyer of October VIX calls, paying up to 0.45 for over100k Oct 22 calls.  The point is that we seem to be in a period of roiling changes, like a shifting of tectonic plates.  In terms of societal structure, we’ve seen the “Arab Spring” and other revolutionary actions and military hotspots.  It almost seems to me that the Scottish vote is just another link reflecting a global sense of societal disappointment, to be shortly followed by Catalan in Spain.  Central banks had quashed volatility with ZIRP policies, but recent fx action is a sign of a leak in the dam.  If longer term interest rate markets unhinge, then certainly the cult of “nowhere else to go” pervasive in the equity markets will also crumble.  (New lows as well in crude oil this morning).
–Markets appear to be on the cusp of rejecting central bank “control”. This is a HUGE Fed meeting, one that could mark an historic shift.  We are seeing one breakout after another, following societal rejection of governments and borders across the globe.  CME stock investors seem to be banking on increased volumes and volatility as the stock surged to 8 month highs in an otherwise weak market.  ICE also jumped Friday, breaking the year’s down trend. Leave it to a (hopeful) broker to project pandemonium in global markets and then point to a micro example of futures exchange prices… But all the examples of compressed risk spreads will fade to distant memory within a year.

Posted on September 15, 2014 at 4:48 am by alexmanzara · Permalink
In: Eurodollar Options

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