Discount rate hike spurs curve trade unwinding
Fairly significant curve flattening in response to the Fed’s discount rate hike. Sev’l Fed officials immediately reassured the market that the move was mostly symbolic. 2/10 treasury spread fell under 286 bps from record 293 Thursday. Red/gold pack spread in euro$’s dropped 8 bps to close near 280. Reds took the brunt of the selling as four block trades of 2000 red packs took place from -5.75 to -9.0 (total 32k contracts). I am assuming the trades were an exit but CME data on open interest wasn’t available at the time of this writing.
–There was a grab for red eurodollar straddles early in the session, for example EDH11 9862^ traded 90, but faded to 88.5 by the close. The strangle seller in tens used Friday as an opportunity to crush the TYM 114/119 strangle from 1-11 to 1-08, about 10k. In summary, the market doesn’t appear overly concerned about an imminent tightening campaign, but rather used the Fed as an excuse to exit curve trades.
–In the US, the Nat’l Governors Assn expects states’ finances to continue to deteriorate: (Reuters) “…the group found that states have $18.8 billion of budget gaps yet to be closed in fiscal 2010. This comes after they have already imposed measures to eliminate budget imbalances totaling $87 billion in the fiscal year, which for most started last summer.
In the budgets they are drafting for fiscal 2011, states foresee shortfalls of $53.6 billion and for fiscal 2012 $61.6 billion.”
–Bernanke and Yellen today. Bernanke semi-annual testimony Wed.
