Sept 17. FOMC… Going to be a considerably long day

–FOMC today. My thought is that “considerable period” remains in the statement, as global deflationary forces continue. The fact that China is injecting $81B into its banking system is evidence of a slowdown. The immediate result was a rally in Aussie, and in copper, etc. But the initial moves may not hold. The fact that every central bank feels the need to just do ‘just a little bit more’ to keep the plates spinning is a sign that organic growth is tepid at best. Even if the Fed does change the language, eventual rate hikes in the US are likely to be cautiously spread out.

–Curve steepened as red euro$ pack was the outperformer +2.875. Red/gold pack spread gained just over 2 bps to close near 196. 2/10 treasury spread edged to a new recent high at 205.6. The peak one year calendar spread on the dollar curve remains EDZ15/EDZ16 which is 109. There has been very heavy long positioning in this spread through options…selling midcurve put spreads on EDZ15 and buying put spreads on EDZ16.

–The difference between the Fed dots and market pricing may begin to narrow a bit. I would think that longer term dots continue to edge down from 3.75%, and perhaps reds to golds steepen from here. However, geopolitical events may intervene and keep the back end of the US curve well bid. There was a notable buyer of 10k TYZ 127c yesterday…these are about 35 bps out of the money, somewhere around 2.25% on the current ten year note. If Scotland breaks up with the UK and France is downgraded (Citi warning of the possibility), then US safe haven status will keep treasuries firm.

Posted on September 17, 2014 at 7:14 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply