July 6. Strong headline employment data pulls tightening schedule slightly closer
–Stronger than expected NFP on Thursday of 288k, with rate of 6.1% sent interest rate futures lower, but final net change was modest. Greens were weakest at -5.5 bps. Ten year yield was up only 2.2 to 264.7. The eurodollar curve flattened with red/gold pack spread down nearly 4 bps to 220.25; reds -5.125 and golds -1.25.
–In the near part of the curve, Dec 14/Dec 15 and March 15/16 one year calendars made new highs as the market again moves the tightening schedule forward. EDH15/H16 settled 93.5, up 4 on the day.
–There was heavy buying of EDM5 9900p for 4.0 bps covered 43.5 to 45. Settled 4.0 ref 9944.0. Total volume was 120k in this strike, though according to prelim open interest sheets, net change was only -5183. Some of these puts were bought vs Short June 9725 puts, (flat prem 4.0 and 4.0). The other big trade in front was a buy of 75k EDZ4 9962/9950ps for 0.75 covered 9972.
–There hasn’t been much trade in front quarterly options and it seems to me that the June puts reflect a lackadaisical sense of complacency, almost bordering on contempt. With over 11 months until expiration and the possibility of tightening next year. 4 bps doesn’t seem like much for less than 50 bps away. Inflation seems to be picking up. FOMC minutes on Wednesday, Fed semi annual testimony later this month. Stanley Fischer speaks Thursday. It’s been a long time, but when the first rate hike actually comes, the immediate reaction is going to be ugly.
–3’s, 10’s and 30’s auctioned this week.
