Feb 20. Fed Minutes Today

–Yields eased Tuesday with tens -2.1 bps (from Friday) to 2.643.  In euro$’s, EDU9 through the golds settled +3.0 to +4.0 with a modest bias toward flattening; red/gold pack spread edged to a new recent low of 9.25 bps.

–Option activity favored upside.  For example, EDU9 9725/9712 put spreads were sold on exit at 2.5 over 100k, but there’s still likely 150k left to go.  Settled 2.25 vs 9738.0.  There were quite a few call structures, but I will just mention a few on EDZ9 since that contract still has the most interest on the futures side.  First, the selling of straddles continues, with EDZ9 9737 straddle sold at 26.5, 5k (settled 26.5 vs 9735.0).  There was a buyer of 20k EDZ9 9800/9900c spds with +40k 9850 calls for 4.0 covered 9735 and 9734.  And then a buyer of another 20k EDZ9 9800c vs EDH0 9800/9850/9900 c fly for 0.75.  In any case, EDZ9 9800c settled 2.25 vs 9735.0….the Fed dots last indicated 2 hikes in 2019…the market is leaning in the exact opposite direction as Fed minutes from January are released today.  In fact, EDZ9 9700 puts, which are only 35 bps out of the money settled at 2.0, a quarter bp under the 9800 calls which are 65 out as the underlying futures trade just 5 bps away from the current Fed Funds Effective rate.


Reuters article notes the change in the stance of Central Banks:

https://www.reuters.com/article/us-asia-economy-rates/in-sharp-u-turn-monetary-policy-easing-back-in-play-across-asia-idUSKCN1Q90G0

Posted on February 20, 2019 at 5:18 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Atomic number 46

–It would be wise to be long palladium, number 46 on the Periodic Table.  See what I did there?  Palladium is named after the Greek goddess of wisdom, Pallas.  And it’s  up over $50 this morning to  new high of 1458!  In early November, gold (GCJ) was about 1215/oz.  PAH (March Palladium) was 1075.  Now palladium is 1458 and gold is up $10.40 this morning to 1332.50, which is also a new high.  Mostly used for pollution control in catalytic converters, but I don’t know what’s driving this move.

–Rates are about steady and stocks edging a bit lower this morning.  Implied vol in rates was crushed at the end of last week.  Tomorrow sees the release of the FOMC minutes, and there is an article on Bloomberg indicating that ECB officials are getting increasingly nervous about deceleration in the EU.  The ECB releases its summary of January’s meeting on Thursday.  “The backdrop is a recession in Italy, stagnation in Germany, and a sharply changed outlook for the 19-nation euro area.”https://www.bloomberg.com/news/articles/2019-02-19/ecb-heavy-hitters-are-laying-groundwork-for-response-to-slowdown?srnd=premium

–Praet said the ECB could change guidance if the outlook worsens; Kuroda said the BOJ could ease if a stronger yen hurts the price goal path; China is pledging more support for its bank perpetual bond swap scheme.  They out there panickin’.  I can feel it.

Posted on February 19, 2019 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 17. Heisenberg Uncertainty

The Heisenberg Uncertainty says that the position and velocity of an object cannot both be measured exactly, at the same time, even in theory. (Werner Heisenberg).  The very concepts of exact position and exact velocity together, in fact, have no meaning in nature.(1) “Any attempt to measure precisely the velocity of a subatomic particle, such as an electron, will knock it about in an unpredictable way, so that a simultaneous measurement of its position has no validity.” Nor does position and velocity have meaning at the Federal Reserve.

Of course, Heisenberg was dealing with sub-atomic particles.  (Yes, I watched a fascinating physics documentary on Nova, and now I am taking a topic that vastly exceeds my comprehension and trying to  apply it to monetary policy and markets, which vastly….well, you know the rest).  Anyway, the very act of observing and measuring these particles affects their behavior.  Powell at the start of the year, changed course on monetary policy after being put under the microscope by Trump and becoming the subject of intense criticism.  Now it’s hard to tell where the Fed is going, let alone how fast.

A couple of weeks ago in my note ‘Blue Sky’, I cited the TBAC (Treasury Borrowing Advisory Committee) minutes.  One sentence is key: “The presenting member outlined the potential for a significant financing gap over the next ten years in the context of the potential need for domestic investors to participate more if foreign reserves were to grow at a slower pace.”  Clearly, increased US deficits, projected to be $1 trillion this year, in the context of slower global trade that requires less official recycling of dollars into foreign reserves, is perceived as a possible problem. 

At the end of last week Zoltan Pozsar of Credit Suisse released a note discussing, in part, this funding gap.  According to people that saw the note, he said that as official foreign buyers are less of a demand factor, private foreign buyers will become more important at the margin.  The difference?  Private buyers hedge out fx risk through cross-currency swaps.   The argument is that a couple of years ago, the US curve was the steepest globally (providing carry to both domestic and foreign buyers) and now is the flattest due to the Fed’s hiking regime.  This creates a situation where cross ccy bases make it uneconomic to fund longer dated purchases of US treasuries.  Indeed, USD three-month libor is around 2.69% and the ten year yield on Friday was 2.664%.  This pulls the prospect of a “significant financing gap” quite a bit forward in terms of time. 

One of the conclusions that Pozsar draws is that libor-ois will tighten significantly and may even go negative this year!!  Xccy bases will go from negative to positive.  In order to fill the ‘financing gap’, funding costs will need to drop on the front end, which may require the Fed to cut rates.  These potential cuts aren’t to address falling inflation and growth expectations, they will be necessary to clear treasury supply.  Of course, much higher yields on the long end relative to current funding costs would accomplish the same thing, but implications for stocks are very different.

Now we draw into the discussion recent activity and economic trends.  After a weak Retail Sales report this past week, the Atlanta Fed GDP Now forecast for Q4 2018 was slashed from 2.7 to 1.5%.  The NY Fed’s Nowcast fell to 2.23% for Q4 from 2.4%, and the estimate for Q1 2019 was cut in half to 1.08% from a previous stab of 2.17%.  Also of note is the University of Michigan’s 5 to 10 year inflation expectations survey which came out last week.  From BMO: the data “…declined 0.3% to tie an all-time record low at 2.3%.  Although drops of similar magnitude have occurred in the past, this is only the third time we’d seen this size of a change this decade.”  As mentioned during the week, the Baltic Dry Freight Index has crumbled by 2/3rds over the past year.

The ten year note to inflation-indexed breakeven is now 1.87%, down 20 bps from early November, and the 5y5y forward inflation swap is 2.19% having spent most of 2018 above 2.4%.  These market-based indicators support the idea of a stagnant economy where inflation runs below target.  But is that justification for Fed easing? 

As discussed in previous notes, some of the trades going through Eurodollar options appear predicated on the idea that one or two eases take place by autumn.  For example, there is a consistent buyer of EDU9 9775/9787.5 call spreads for just under 1 bp (ref EDU9 9735). On Friday there was a buyer of 50k EDZ9 9850c for 0.75.  Of course, if position and velocity are uncertain due to what almost seems to be the mundane problem of treasury supply, then why is implied volatility being crushed to new lows?  There is relentless selling of EDZ9 straddles, on Friday the 9725 line was sold at 26.5 and the 9737.5 line sold at 27.0, with settles of 26.0 and 27.0… with 300 days until expiration.  EDZ9 settled down 1.5 bps at 9732.0; the 9725p settled DOWN 0.25 and the 9712.5p settled DOWN 0.5 at 5.0.  Market maker ML noted it’s the earliest he’s seen the atm TY straddle below 1’00.  With 5 weeks to go, TYJ 122.5^ settled 0’62.  Here’s a visual:

So we have a flat curve sucking the air out of premium.  Near one-year Eurodollar calendar spreads are all negative (the lowest being EDZ9/EDZ0 at -16.5) suggesting that the next Fed move will be an ease.  The FF curve through 2019 is within 1 bp of the current Fed Effective of 2.40% with Jan 2020 at 97.62, a demure tilt toward a looser Fed.  The euribor curve is flattening.  Global ten year yields have all been declining.  From the start of Q3 the US ten year has fallen from around 3.20 to 2.67.  China from 3.60 to 3.07 (both just over 50 bps).  Bunds from 55 to 10.  Japan from 14 bps to -3. The rate environment again points to TINA… there is no alternative besides stocks, a theme further enhanced by the prospect of a US/China trade deal.  The very scenario that Powell was supposedly leaning against is now settling over the financial landscape like a wet blanket: Financial speculation without cushion; a flimsy backdrop of growth; earnings that can only be juiced by buybacks which further erode corporate balance sheets.  To layer it on even thicker is the emergence of Modern Monetary Theory (or debt monetization) and the left’s Pyrrhic victory of forcing Amazon’s withdrawal from NY. 

https://www.themacrotourist.com/posts/2019/01/23/mmt/

https://www.mauldineconomics.com/frontlinethoughts/modern-monetary-madness

I’ll leave it with another profound physics comment, this one from Albert Einstein.  “The difference between genius and stupidity is that genius has its limits.”

OTHER NOTES

FOMC minutes on Wednesday.  Philly Fed, Durables and Existing Home Sales Thursday.

I don’t know how much I can buy into the idea of lib/ois going to zero or negative, but here’s the nearby forward proxies represented by futures.  I use 3 month quarterly ED contracts vs the average of the next two FF contracts.  All around 25 bps.

EDM9 9736.0 vs avg(FFN9+FFQ9) 9760.25 =            24.25

EDU9 9735.0 vs avg(FFV9+FFX9) 9759.5    =             24.50

EDZ9 9732.0 vs avg(FFF0+FFG0) 9763.0     =             31.00

EDH0 9739.5 vs avg(FFJ0+FFK0) 9767.0     =             27.50

EDM0 9745.0 vs avg(FFN0+FFQ0) 9772.25 =            27.25

EDU0 9749.0 vs avg(FFV0+FFX0) 9777.25 =              28.25

2/08/2019 2/15/2019 chg
UST 2Y 246.1 251.8 5.7
UST 5Y 243.9 249.3 5.4
UST 10Y 263.0 266.4 3.4
UST 30Y 297.4 299.7 2.3
GERM 2Y -57.9 -55.6 2.3
GERM 10Y 8.7 10.2 1.5
JPN 30Y 57.5 59.2 1.7
EURO$ H9/H0 -9.5 -3.5 6.0
EURO$ H0/H1 -13.0 -12.5 0.5
EUR 113.26 112.98 -0.28
CRUDE (1st cont) 53.09 55.98 2.89
SPX 2707.88 2775.60 67.72
VIX 15.72 14.91 -0.81
Posted on February 17, 2019 at 9:14 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 15. Taking downside risks ‘on board’

–Treasury yields fell Thursday, initially spurred by weak retail sales, which fell 1.2% on headline (broad-based weakness and worst since 2009).  Fed Governor Lael Brainard mentioned the miss in retail in the context of increased downside risks, and noted weaker foreign growth and political uncertainty as well.  She further said that she favored ending balance sheet run-off in late 2019.  The ten year yield fell 5 bps to 265.7.  On the euro$ strip reds thru blues were up 5 to 6 bps. Volume was light and implied vol continues to be smothered.  About a month ago the green pack 9750 straddle strip traded as high as 372, but settled yesterday at 307.5.   Sure, some of that is due to time decay, but not 17%!   

–Stocks fell, but then shrugged off the retail sales number. However, by the end of the day domestic political uncertainty again crept in, with reports that Trump would declare an emergency to build the wall.  Perhaps at the margin there was also a negative reaction to the decision by Amazon to pull out of plans for HQ2 in NY.  The general move on the political spectrum to the left may be sharpening the edges between gov’t and business.  After Trump was elected, the NFIB Small business optimism index surged and remained elevated…until recently.  Perhaps some of THAT decline is due to dragging uncertainty related to China negotiations.  But a harsher environment for big tech and business in general has to figure into the equity valuation equation.

–There is still upside accumulation of EDU9 9775/9787cs, bought for 0.75 yesterday only in 10k, but both strikes have over 215k in open interest.  Also a new buyer of 30k EDZ9 9850c for 1.0.  When Brainard repeatedly says the Fed is “taking on board” the idea of growing downside risks (in spite of solid domestic employment trends) it’s not that much of a leap to envision rate cuts in 2H.

Posted on February 15, 2019 at 5:17 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 14. Baltic Freight and Bond Vol….crushed

–Trade activity remains rather quiet.  Yields pushed higher and the curve flattened yesterday.  The ten year was up 2.4 bps to 2.706% while the 30-yr bond only rose 1.1 to 3.033.  Not much change in one year spreads, though in the very front end of the curve, both June/Sept and Sept/Dec ED spreads notched new highs at 2.0 and 3.5 respectively as the strong stock market in 2019 rekindles the idea of possible rate hikes. It’s worth noting continued heavy volume in EDZ9…total volume was 430k with the next closest being EDH0 at 280k….in EDZ9 there was one sale clip of 50k at 9731.0.  The settlement was 9729.5, -4.0 on the day.  EDZ9/EDZ0 spread was +1 bp at -17.0, once again it’s the lowest spread on the curve.

–Possible extension of the China tariff decision push stocks a bit higher.  EUR is nearing new lows.  Late last year low was 1.1216 and now 1.1270.  

–NY Fed released UIG (Underlying Inflation Gauge) yesterday.  Perhaps not too important but seems to show a turndown.  “Prices only” set fell from 2.01% in Dec to 1.92% in Jan.

–A few charts below.  At the bottom is implied and historical vol on the 30-year bond contract, mired near historical lows (longer term chart) and quite a bit below 30 and 60 day historical (bottom shorter term chart).  In Q2 2018 the ten year yield was around 3.2% with fears of a push higher, now the market has become convinced the 30-yr is locked at 3%.  

–The chart immediately below highlights the Baltic Dry Freight Index in white.  Many commentators have mentioned the drop, but I was actually surprised to see that it has fallen by 2/3rds since Q2 2018!  I have added WTI crude and stocks on the chart below.  Everything bottomed in the energy rout of early 2016.  Currently, it’s only stocks that truly embrace the idea of Central Banks keeping the liquidity spigots going.

Below is a five year chart of Baltic Dry Freight Index in white, WTI Crude in yellow, and SPX in blue.  Everything bottomed in the start of 2016.  From there, oil lagged while SPX and BDI had a zig zag rally.  Since Q2 2018, the BDI has plunged by 2/3rds and is nearing the lows of 2016

Posted on February 14, 2019 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 12. Something about Q3

–Friday’s lower yields disappeared on Monday, with tens backing up 2.9 bps to 2.659%.  However, out-of-the-money eurodollar call spreads continued to be accumulated.  Another 30k EDN 9762/9787 call spread bought for 1.75 (settled 1.5 vs EDU9 9736.5) and EDU9 9775/9787cs bought for 1 in size of 46k.  There was also a roll out of long midcurve June call spreads to July.  Sold 0EM 9800/9837cs and 2EM 9800/9825 call spreads to buy 0EN 9812/9837cs with the Short July trading 50k and settling at 1.5.  One interesting aspect of these trades is the Q3 target… buying of July and Sept expiry while June just sits.  These trades require aggressive Fed cuts for any possibility of going in the money.  As client JF notes, although rate HIKES have all been 25 bp increments, there’s a possibility of a 50 bp CUT if the economy tanks; the asymmetry of Central Bank Policy.  In some ways, these trades argue for a simple sale of EDM9/EDU9 spread which settled +0.5. Red June/Sept (EDM0/EDU0) is already -4.5. 

–The big news today is a tentative agreement to keep the government open, which is providing a boost to risk assets.  As mentioned over the weekend, a rapid one-two punch of a gov’t agreement followed by a China/US trade pact is NOT priced into risk assets. 

–CLH9 (March WTI crude) is currently up 60 cents over $53/bbl having bounced strongly off yesterday’s new recent low of 51.23.  Perhaps also worth a quick note is that Hang Seng has just surpassed the October high (from which almost all global markets sold off).  However, copper is lower today. 

Posted on February 12, 2019 at 4:55 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 10, 2019. Interest rate lethargy

What is the market telling us?  First I would point to the short term interest rate calendar spreads.  On the Eurodollar curve, the lowest one-year calendar is Sept’19/Sept’20 which closed at a new monthly low of -20.  In the beginning of January, just prior to Powell’s dovish shift on Jan 4, the lowest one-year spread was -28 and that was June’19/June’20.  At that time March’19/March’20 settled -27.0.  Just after the change of tone by Powell, spreads all rallied.  In fact, by late January, EDH9/EDH0 had surged all the way back up to positive territory, settling at +1 on 25-Jan.  EDM9/EDM0 rallied back to -7.5.  But now, even though risk assets have shaken off a bad December, interest rate markets are decidedly forecasting a lack of economic vigor that will result in Fed eases and lower global rates. 

It’s not just the euro$ curve.  Euribor calendar spreads have all compressed as well.  For example ERH0/ERH1 which was over 40 bps at the start of October, settled at 15 bps Friday.  This is below the early January low.  The ten year German Bund is just under 9 bps, also a new recent low, down 8 bps on the week, and the lowest since late 2016.  Like the US, near short sterling spreads have thus far held the lows of January, but the trend is a grind down.  The Japanese 30y yield is at a new low of 57 bps. 

In Eurodollars, option trades Friday pursued the theme of a stagnant economy which may require rate cuts by Q3.  For example, there was a buyer of 60k EDU9 9775/9787 call spreads for 1.0 (actually just under 1 as the trade was done covered).  For this call spread to fill out, the Fed would likely have to cut by 50 bps.  In addition, there was a new buyer of 50k EDN9 9762/9787 call spreads for 1.75 to 2.0. The EDM9 9737 straddle is trading 10.5 (settled 11) and someone is willing to pay 2 for a two-ease call spread in July?  While the EDN 9762.5 call settled 3.0, the equidistant 9712.5 put settled 1.25 (EDU9 9738).  As of Friday, FFF0 settled 9766.5, or 6.5 bp discount to the current Fed Effective, indicating odds of 1 in 4 for a rate cut by year end.

There was also a large buy of EDZ9 9737/9750/9762/9787 broken call condor for 1.0 (70k).  This trade would perform best with a slow grinding rally and perhaps 1 cut into the end of the year.  Nothing dramatic, but nothing to suggest a new round of economic buoyancy.  Positive return at expiry between 9738.5 and 9774.0.  Same in EDM9 is 2.25 and EDU9 is 1.75.

It’s becoming somewhat difficult to separate the markets from domestic and global political decisions.  When looking at the ten year yield since Trump, it’s pretty clear that increases in rates have been driven by the President.  In 2016, the yield surged on Trump’s election, as the market expected economic acceleration due to removal of regulatory shackles and growth policies.  2017 was sort of a sideways trade, [red rectangle on the chart below].  Q1’17 saw yields range between 240 and 260…there was a downward lull in the middle of the year, and then Q4 was again 240 to 250.  However, in the beginning of 2018, the tax package sparked another yield rise, this time up to 310, eventually culminating in a high just under 325 in September.  Now the market is forecasting a yield drift lower, indicating that the Fed stepped too hard on the brakes and that the tax stimulus has ended, so perhaps a re-visit of late 2017 yields. 

Whatever one’s opinion of Trump, he seems able to snatch victory from the jaws of defeat.  Over the balance of this month are two large deadlines: the government shutdown of Feb 15 and the China tariff of March 1.  Imagine for a minute that Trump accepts other measures besides a wall for border security, and then puts a softened proposal in front of Xi.  In other words, that he makes two deals rapidly, removing uncertainty. Stocks would likely build on January’s gains and yields would sit up and take notice of a new surge of growth prospects, especially if the Fed announces plans to taper balance sheet run-off in March (perhaps also a partially politically motivated act).  The odds don’t seem particularly high, and bond markets are thought to send more appropriate signals than stocks, but this outcome is not priced at all. 

One other topic I’d like to cover relates to Consumer Credit which was released last week.  While the press wrings its hands over household debt and student loans, I would simply say that the Household Sector is in good shape and that Student Loan debt perhaps needs to be thought of in a different way. 

In Thursday’s Consumer Credit report, student loans were reported at a record $1.569 Trillion, a pretty amazing number.  That debt is primarily the asset of the US government.  At the end of 2008, student debt was $639 million, so the increase has been nearly $1 trillion over the last 10+ years.  According to the Fed’s Z.1 quarterly report, Total Consumer Credit debt at the end of 2008 (of which student debt is a subset) was 2.644T and at the end of Q3 2018 was 3.938T, an increase of $1.294T.  I can’t quite get the numbers to exactly match from the NY Fed’s data on student loans to that of the main Fed website, but the point is that almost all of the consumer credit increase in the past ten years can be attributed to student loans!  Over the same time period US Gov’t Federal debt went from $7.377T to $17.754T, an increase of $10 trillion. 

In some ways the student loan program has been a big economic transfer program. Think of it as investment in human capital.  At the same time, college facilities have expanded, athletic and recreation opportunities have exploded.  It has likely led to university staff increases at all levels.  The wealthier families pay full freight for tuition and the very wealthy make donations to endowments and facilities.  Imagine for a second that all student debt was cancelled. A loss to the federal revenue stream of perhaps $100 billion per year in foregone interest?  Perhaps not even that much as a significant percentage isn’t being serviced as it is.  An increase the Federal Debt?   No one seems to care much about that any more.  Would the increases in expenditures on housing and consumption offset the cost?  Possibly.

Of course, it’s not fair.  Not fair to the people who skrimped and saved to pay their tuition.  Not fair in that some of the school loans didn’t finance education at all, but rather paid for spring break. But debt jubilees are coming, one way or another.

2/1/2019 2/8/2019
UST 2Y 248.8 246.1 -2.7
UST 5Y 250.7 243.9 -6.8
UST 10Y 268.7 263.0 -5.7
UST 30Y 303.2 297.4 -5.8
GERM 2Y -58.1 -57.9 0.2
GERM 10Y 16.6 8.7 -7.9
JPN 30Y 60.2 57.5 -2.7
EURO$ H9/H0 -7.5 -9.5 -2.0
EURO$ H0/H1 -10.0 -13.0 -3.0
EUR 114.59 113.26 -1.33
CRUDE (1st cont) 55.26 52.72 -2.54
SPX 2706.53 2707.88 1.35
VIX 16.14 15.72 -0.42
https://www.newyorkfed.org/studentloandebt/index.html
https://www.federalreserve.gov/releases/z1/20181206/html/d3.htm
Posted on February 10, 2019 at 2:06 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 8. Libor Un-rigged

–The big feature Thursday was a whopping 4 bp drop in the 3-mo libor setting to 2.6970.  Trade activity was fairly light, although there was good buying in EDM9 9737/9750 call 1×2 for 0.75.  The declining libor rate along with an idle Fed is putting the 9737 strike in play.   Tens fell 4.8 bps to 2.652%, while the euro$ curve rallied a like amount, with reds thru golds +4.5 to 5.5 bps.

–Trump won’t be meeting Xi prior to the tariff deadline (net negative for stocks) and Bullard says he now feels that the Fed is somewhat restrictive, which makes it more unlikely to  sustain the inflation target.  Negative calendar spreads in eurodollars reflect the same view: a currently restrictive Fed that may have to loosen.  EDZ9/EDZ0  fell another bp to -19.0 which is a new recent low.  The spike lows in one-year calendars came on the panic sessions of Jan 3 and 4, with prints of -30.   I have attached below a chart of euribor ERH0/ERH1 (used the red/green because hikes in europe had been projected further out on the time horizon).  This spread has declined from 40 bps in October to a new low of just 17 yesterday, BELOW the level of early January.  The FT has a headline that says “German minister rejects fears of serious downturn” but the market is saying. ‘perhaps it’s not yet “serious” but a downturn is clearly here.  The German bund posted a new low of 11 bps yesterday, lowest since late 2016 (the low in mid-2016 was -19 bps).

–Back to the US,  the Fed effective is 240 bps points and the two-year treasury is 247.7.  Friend RM points out that 3-month libor is above the US ten year yield (chart below).  What does this mean to corporate America?  In a way, it means that longer term projects may not be able to be funded economically…so we’ll just return to stock buy-backs.   

–One interesting trade of note was a red/blue synthetic steepener.  If the Fed moves towards easing, the reds should lead the upside.  Buyer of 60k 0EU 9775/9812cs (7.25s) and sold 30k each 3EU 9775/9812cs (6.25s) and 9787/9825cs (4.50s).   

–Consumer credit out yesterday.  Student debt up to $1.569 T, a new high.  More on that over the weekend…  

Below is 3m libor vs US ten year treasury (green more or less represents positive carry).  Chart above is ERH0/ERH1

Posted on February 8, 2019 at 5:05 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Feb 7. Neutral CBs stifle markets

–Once again it was a light volume day with little change in rates.  Tens fell less than 1 bp to 2.700%; thirty year auction today.  Near eurodollar contracts were modestly lower with EDM9 and EDU9 down 1 on the day, while EDM0 back rose 1 to 1.5.  Net result was weaker one-yr calendars, with EDZ9/EDZ0 easing to -18.0 (-1.5 on the day and lowest on the curve).  

–Early new buyer of 40k FVJ 114.75/115.75 call spread for 16; settled 15 vs 114-20 in FVM9.  There has been relentless selling of EDZ9 9725 strike, with over 20k calls sold yesterday.  The 9725 straddle settled 28 vs 9731.0.  Yesterday I mentioned the long green pack 9750 straddle strip, which had declined from 372 to 327 in a month.  Late afternoon it was sold down to 315, though I marked the settle at 318.5.  The change in Fed stance is sucking the life out of premium…

–However, it’s not just the Fed.  The FT this morning notes ‘European Commission cuts Italy’s growth forecast to a five year low.’  Perhaps this morning’s quote from the RBI sums up the global pivot.  “The shift in stance from calibrated tightening to neutral provides flexibility to address and the room to address sustained growth of the Indian economy…”  The new RBI head is Shaktikanta Das, who replaced Urjit Patel.  Patel bristled at the encroachment on the central bank’s independence and quit.  Now…looser policy. The recurring global theme is that easy money will support growth.  BOE meeting today also expected to trim growth forecasts. 

Posted on February 7, 2019 at 5:04 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Code Name: Jägermeister

The Russian Navy developed a “new” weapon that makes people vomit and hallucinate.

https://thehill.com/policy/defense/428346-russian-navy-has-new-weapon-that-makes-target-hallucinate-and-vomit-report

Posted on February 5, 2019 at 5:21 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options