When doves fly

June 20, 2019

–Easily the most bullish reaction I’ve ever seen to a non-ease, as Powell said the case for accommodation has strengthened in light of global risks and lower market measures of inflation.  He said that near the effective lower bound, an ounce of prevention might be worth a pound of cure.  I had thought the front end would shift lower on disappointment as the Fed held FF unch’d, but the market immediately priced the ‘pound of cure’, with an added dollop of prevention.  Near euro$ and FF contracts exploded to new highs and the curve massively steepened.    At settlement, the white pack (1st four contracts) gained 12 bps, reds +10.25, grns +6.125, blues +3.0 and golds +0.875.  Thus, red/gold pack spread rose nearly 9.5 bps.  At futures settle, the 2yr note had sunk over 10 bps to 1.758% while tens fell 3.3 to 2.023%. Tens are sub 2% this morning, with additional support coming from news that Iran shot down a US drone.  2/30 treasury spread jumped nearly 9 bps to a new high over 79 bps, as shown below. 

–July Fed Funds necessarily fell as the FF target won’t change through July (97.64 settle) but the July FOMC is priced at around 2 in 3 odds of a 50 bp cut.  At settle, July/Aug FF spread was -31.5, while the spread which prices the Sept FOMC, Aug/Oct, fell only 2.5 bps to -20.0 (80% odds of a 25 bp cut in Sept).  Front-loaded prevention.  

–Implied vol was hammered both prior to and after the Fed.  Straddles lost another 2-3 bps on the dollar curve.  As an example, on Monday I marked EDZ9 9850c 7.0 bid vs 9806.0.  Yesterday they settled 6.5 vs 9812, and later, against 9815 bid were barely 6.5 bid.  On Monday the Sept 127.5 TY atm straddle settled 2’03, while yesterday TYU 128^ settled 1’57.

–In August of 1971, then President Nixon issued an executive order which ended the US redemption of gold at $35 an ounce.  In December the US dollar was devalued.  This morning Dec Gold is up just a bit more than $35/oz, currently at $1398.  Stocks have also exploded and are near all-time highs, while the dollar continues to weaken after yesterday’s drubbing.  

Posted on June 20, 2019 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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