Sept 13. Clubbing Red Dec

–Some large trades of note yesterday. First, rates eased slightly, with tens down 1.8 to 296.1. The only contract in the first 8 years on the eurodollar strip that was unchanged (all others were up 0.5 to 2.0 bps) was EDZ19, red dec, which was mercilessly sold on volume of about 140% of the next most active contracts. Open interest rose by 47k according to prelims. This contract is the peak open interest of any contract with nearly 2 million, a remnant of heavy trade early in the year of EDZ8/EDZ9 spread trades. So this is new selling, and EDZ8/EDZ9 settled at a new high of 44.5 bps. Also worth noting is that we’re two weeks away from the FOMC and new dot projections. I think the Fed’s SEP has encouraged trading in Dec contracts as the projections are for year-end. In any case, the 2019 end of year Fed projection for FF was 3.1, up from 2.9 in March. EDZ9 settled at 9690.5 or 3.095%. Add in a spread for lib/ois and there’s room for downside (if one believes in dots). However, rarely have the market and the Fed been on the same page in the history of the SEP. (I would touch upon a few aspects of Brainard’s somewhat hawkish speech yesterday, but don’t have the time…).
–The other huge trade yesterday was on the same part of the curve: Buyer of 200k 0EH 9687/9662/9637p fly 1x3x2 (so +200k/-600k/+400k). Max profit at expiry is at center strike. So this trade, with EDH20 underlying, is also sort of in line with Fed dot projection. Trade currently has call delt of about 6. Traded average 1.75 bps on blocks. According to my rudimentary model, if vol was flat on the downside this pkg would have traded zero premium; the downside is, and has been, crushed, due in part to the long-dated red and green put ratio trades. In any case, the trade is a new position. 0EH 9662p settled 5.5, with a ‘normal’ skew should be more like 7.
–The curve reflected the weight in red dec in a more general (trending) way. Near calendars made new highs, and the back end of the curve flattened to new lows. For example, reds to blues (2nd year to 4th year) made a new low of MINUS 4.875 bps and reds/golds to -3.25. While 2/10 treasury was only -1.5 to 21.5, the 5/30 notched a new low at 23.3. Brainard and the rest of the Fed seem to favor 3m to ten year as their curve measure, but back end of the ED curve is signaling slower growth.
–One other trade worth mention: buyer 50k FFF9 9763.5 to 64.0. Exit trade, squeezed as much as possible out of that particular stone which reflects high odds of 2 more hike by year end. (OI -30k)
–CPI data today expected +0.2 across the board. YOY expected 2.9% with Core 2.4%. 30 year auction as well. ECB this morning.

Posted on September 13, 2018 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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