Feb 25. Quiet Monday with curve flattening bias
–Quiet day in rates yesterday. Continued selling in TY straddles, notably TYM 124 from 219 to 215 (settle). April, May and June TY at 4.6 vol. In eurodollars there was a large closing seller of 25k 2EM 9775p at 2.5 covered 9850/50.5. The theme yesterday, following through from last week, is selling of gold eurodollar puts vs buying greens at flat premium. Spread between green pack (3rd yr) and gold pack (5th yr) is around 181 bps, the option spreads have mostly been struck at 187.5 (difference between strikes). These trades are synthetic flatteners. In the same vein, there was an outright seller of 10k Blue Dec 9637p at 15.5, 25 delta, 64 bps away. Taken together, the market doesn’t seem to have any fear of the downside in the longer end of the curve.
–Stocks made new highs on moderate volume. Several commodities also posted new recent highs, with coffee up 52% since the end of January. Soybeans also made a new reent high, up about 8% since the end of Jan, from 1270 to 1370.
–China’s currency is trending lower. I don’t know if there are technical reasons, but it makes sense to me that China would eventually want a weaker yuan in response to Japan’s devaluation, and weaker EM. Though the CRB is on a tear, manufactured products will likely remain under intense price pressure as China looks to exports to compensate for a slowing property sector.
