March 24. The market robotically moves tightening forward on the curve
–Friday’s trade continues to indicate a perception of the Fed’s first tightening moving forward on the calendar. However, there is no reaching for puts, just pressure on the front end of the curve that is alleviating sell pressure on the back end. Like a half empty tube of toothpaste; squeeze the front and it goes to the back. The cap is still on.
–So, while the five year was unchanged at 171, tens fell 3 bps to 274.5, and 30’s fell 5 to 361. New low in 5/30 spread to 190. Red/gold pack spread at new recent low 257.5, a level last seen in June. Treasury auctions 2, 5 and 7 year notes this week, just to drive home the flattening. The ultra bond contract is right back where it was prior to FOMC. Implied vol in tens is back down around 4.6. Big (25k) buyer of TYM 124/125 call spreads covered on Friday, position exit.
–In eurodollars, downside trades show similar restraint. In midcurves, buyer of short (red) June 9925/9900p 1×2 (EDM5 underlying). Next contract back and a strike lower, a buyer of 50k 0EU 9900/9862/9825p fly for 5.5 (ref 9909). Next contract back and a strike lower, a buyer of 5-10k 0EZ 9875/9837/9800p fly for 5.5 (ref 9882). These contracts will all expire THIS year before the first actual hike. Just a telegraphed repricing of dependable 25 bps rate hikes. I hope it’s not actually that boring. And to add a little spice, some buying of green puts vs golds, and further tightening or inversion of back month green midcurve straddles relative to blues (eg 2EZ 9775^ 71.5 and 3EZ 9687^ 71.0). Peanut butter and jelly on wonder bread.
–Where there does seem to be action is China. “The flash Markit/HSBC Purchasing Managers’ Index (PMI) fell to an eight-month low of 48.1 in March from February’s final reading of 48.5” (Reuters). So, in a part of the world where we might expect control, there has been currency depreciation, growing cracks in commodity financing, and an onset of bankruptcies. El-Erian just had a piece out suggesting (my conclusion) that the bell distribution curve might be pushed a bit lower and wide, but with fatter tails. http://www.businessinsider.com/el-erian-state-of-the-new-normal-2014-3 I think that China represents the fat tail risk. Not so much Russia. They claimed their strategic port, and now just need to keep up a stream of steady threats to keep energy prices high…let the west funnel money into what’s left of Ukraine which in turn pays Russia for higher nat gas.
–Speaking of money transfers, Fisher suggested that QE was simply a gift intended to boost wealth. Then what happens when that gift is taken back?
