Oct 1. 4th Quarter opens with a government holiday
–Not much of a reaction to the gov’t shutdown besides a weaker dollar and elevated levels of implied volatility in interest rate futures. Near eurodollar calendar spreads are making new lows, for example Dec’13/Dec’14 settled -2 at 22.5, down nearly 1/4% from the high of 54.5 set just prior to the last employment report. While there has been a reasonable amount of action around the previous few employment releases, this one will apparently be delayed due to the gov’t holiday. We will get PMI and ISM data today, with the latter expected 55.0.
–So, spreads in the front end of the curve have compressed, but much less so in back end, as Dec’15/Dec’16 is only down around 14 bps from the high. That’s the magic of credible forward guidance, with the ECB on deck this week to frost the cake with another LTRO. The front end locks up while the back end can flop around…relative increases in back end implied vol are a reflection of this idea, with midcurve green and blue premium bid.
–A couple of news snippets provide some evidence that recent turmoil associated with Fed tightening fears spilled into global activity. For example, S Korea exports (proxy for strength in Asian trade) fell 1.5% yoy in September, and Unilever issued a profit warning due to weakness in emerging markets.
–There continues to be buying of FVZ 118.5put vs selling 122.25call, about 90k over past two sessions. Approx -28 delta, net premium around zero, new position, likely protection for core long. Upper strike is about 23 bps out of the money, so on a parallel shift current fives would have to fall to about 1.16 yield for calls to be in the money. As a point of comparison, red Dec midcurve 9950c are out of the money by only 1 bp, and trade just 4.5 bps with fully 3 weeks more time value than Dec treasury options, and there are 470k open positions in the strike. Once again, compression in front, looseness in back.
