Sept 29. Things are getting shaky as we move into the fall

–Friday features were straddle buying and weakness in the red pack eurodollars, which closed -5.875 (hardest hit on the curve).  The theme was either position adjustment by Pimco, or others trying to front run expected changes as Bill Gross exited the firm.  New highs were made in the near one-year eurodollar calendars, again due to weakness in reds, for example EDZ14/EDZ15 was up 6 bps to a new high 84.5 and EDH15/EDH16 was up 5.5 to close 102.5.  Ten year yield rose 2.4 bps to 253.3.  Red/gold pack spread fell almost 4.5 bps to a new low of 180.5.
–Strength in near calendar spreads reflects the idea of hikes beginning a bit earlier.  Or… that Pimco didn’t like the risk of being long the reds…open interest changes indicate heavy long liquidation.  Here are OI changes in reds: EDZ5 -61k, H6 -7k, M6 -50k, U6 -24k.   But green OI was up on the day: Z6 +6k, H7 +20k, M7 -5k and U7 +23k.  All ED contracts -35.7k.   On the treasury side, open interest in fives was nearly unch’d, (the part of the curve where Gross favors the roll up), and tens were down 28k as October options expired.
–What is clear is that there was straddle buying across the board, notably Green Dec 98.875 for 31-31.5 and 98.75^ for 33-33.5 and Blue March 9700^ for 50.5 and 51.0.  I marked 5 yr vol 3.1 (adjusting for weekend) vs a close Thursday of just over 2.8.  Hi yield ETF’s HYG and JNK both closed lower on the day, though well off early lows.  I marked the yields on these two at 5.63 and 5.59 respectively at the floor close (3pm EST).  Five year treasury ended just over 1.80, so the spread to fives is around 3.80.  I will start marking this spread daily.
–Big week ahead with ISM Wednesday and Employment on Friday, with the ECB sandwiched in between on Thursday, hoping to instill market confidence with ABS buying.  But it’s not only confidence in central banks that has been shaken, it’s also been stirred in political systems globally.  In France, Le Pen’s National Front picked up two senate seats for the first time and in Hong Kong protests are gaining steam, with Hang Seng -1.9% today and down over 8% from the high set earlier this month.  From the FT:  “A ‘poisonous combination’ of record debt and slowing growth suggest the global economy could be heading for another crisis, a hard hitting report will warn on Monday”…the Geneva Report suggests rates will have to stay low for a very long time… http://www.ft.com/intl/cms/s/0/4df99d28-4590-11e4-ab10-00144feabdc0.html#axzz3EboufQjJ

Posted on September 29, 2014 at 5:27 am by alexmanzara · Permalink
In: Eurodollar Options

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