Signs of recession lurk in forward euro$ curve

Feb 27, 2019


Yields fell yesterday with end-of-month buying and the conclusion of a slug of treasury issuance with the the seven-year auction.  Tens fell 3.5 bps to 2.637%.  Interestingly, the lowest one-year eurodollar calendar spread on the strip notched a new low as Dec’19/Dec’20 settled -20.0.  While stocks have roared back from the turmoil of late December and early January, this particular spread is actually re-testing the low settle of Jan 3, which was -22.0.  On that date, the nearer spreads were even more inverted, with EDM9/EDM0 settling at -28.0 (this has been the lowest of any one-yr spread).  Currently, EDM9/EDM0 is -14.5.  How to interpret it?  Obviously the panic of early Jan has subsided, but forward recessionary fears are still lurking, and possibly increasing. 

–EDZ9 remains the contract with the most open interest on the strip and trades by far the largest volume of any contract.

–With every quarterly option expiration, there is typical large buying of way-out-of-the-money calls and puts in treasuries.  Often these buys are done just prior to the end of the expiration.  However, March options expired Friday and there were sizable purchases yesterday.  First, upside: TYK 128.5c 2 paid for 70k, and 127.5 and 128c also bought for 2 in smaller size.   TYK 128c have 60k open and 128.5c 80k open.  These strikes are around 3/4% away in terms of yield…around 1.9%.  Huge buying as well in FV puts.  FVJ 112p 0.5 paid 42k, FVK 112.25p 1 paid 113k and then shifted down a strike and paid 1 for 67k 112p, and also paid 2 for FVM 112p 70k.  So about 300k FV otm puts bought; the 112 strike is approx 60 bps out which would be over 3%.  

–We can look forward to the Maxine Waters show as Powell goes to the house for questioning.  Bonus question from AOC?   –CME apparently had major issues and had to close electronic markets last night.  All seems to be functioning currently.  

–ZeroHedge cites a paper by Lawrence Summers and Jason Furman about the opportunity for more gov’t spending due to low real yields.  Not sure what the merits are, however, I would note that the ten-year inflation index note represents a “real” yield, which has been in decline from over 1% in Q4 to just over 70 bps now.  Like low vols, low real yields don’t last forever, and don’t provide a cushion for when things change. 

Posted on February 27, 2019 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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