July 2. Put buying in interest rate markets suggest a move toward rate “normalization”
—Yields edged higher on Tuesday with tens up 5 bps to 256.5. The curve steepened, red/gold pack spread up 2.25 bps to 220. At the end of last year both the ten yr treasury yield and red/gold pack spread were a little over 300 bps, so at midyear, tens are about 50 bps lower while the pack spread is 85 lower.
–There continues to be put accumulation in midcurves. Notably, another 20k Short (red) March 9850p were bought (13.5s, 30 bps out of money). Green Dec midcurve put structures also popular. And in treasuries, a new buyer of 12k TYV 122.5put for 32. Rough calculation, about 20 bps away for premium outlay of about 6.5 bps. Given the flattening of the euro$ curve noted above, I thought perhaps buying blue or gold midcurves would provide better bang for the buck than treasuries, but upon reflection maybe not. On Dec 31, the first gold euro$ was 9641, currently 9686.5…so about 45 bps lower in yield vs about 50 bps lower in ten yr yield. (Also, 4EU 9662.5p settled 6.75…this put is just over 20 bps away- similar pricing to Oct TY put).
–Today’s news includes ADP, Factory Orders (expected -0.3) and a speech by Yellen. The market has Yellen pegged as dovish, but could her presentation be slightly modified by Bullard’s recent hawkish comments? After all, the highest one year calendar is now only 105 bps (EDZ15/Z16) and on Monday the red/green pack spread settled at a new recent low of exactly 100 bps. The market is at levels that suggest much greater downside than upside risk. Any hint by Yellen of labor market/wage improvement just prior to payrolls would likely be seen as quite bearish.
Alex Manzara
I am a registered futures/option account representative, specializing primarily in interest rate option execution for institutional clients. I will also accept large individuals as accounts, for both clearing and execution. For more information please call me at 312 281 4424 or email amanzara@rjobrien.com
