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
In: Eurodollar Options

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