July 17. Possible rate hikes, but back end of the curve says “limited”
–The message from the curve is that the economy will have a hard time digesting even relatively small near term rate hikes. While there has been selling pressure out to greens in anticipation of funds “normalization”, tens remain anchored to 2.5% (yield fell 1 yesterday to 253.6). Near euro$ calendar spreads edged to new highs. For example, EDH5/EDM5 rose 1 bp to 20. EDZ14/EDZ15 rose 2 to a new recent high of 79. However, more deferred one-year calendar spreads actually made new lows. For example, EDU16/EDU17 slipped 0.5 to 80.5. Red/gold euro$ pack spread dipped 1.375 bps to just under 207. The back end of the curve suggests a sluggish economy and lack of inflationary pressure. Peak one year calendar has been and still is EDZ15/16, at just 105.5.
–Treasury volume was light but there was huge trade in various euro$ option structures, mostly put trees and condors. These trades echo the theme from the curve in general; sell offs are likely to be targeted, without follow through. When Carney said near term hikes might be in the offing, short sterling plunged 30 bps, but the new put strike was heavily sold. Same sentiment in dollars, get to a level then stop.
–Green August 9812.5 ^ went from 20 settle on Tuesday to 18 yesterday. USU 137 straddle was 236 two days ago and settled 2’20 yesterday. TYQ 125^ which expires one week from Friday closed just over half a point, at 35/64’s.
–The euro sold off, and appears ready to test 135.00 which has been a recent support area. However, new sanctions on Russia by Obama have spurred a risk-off trade this morning. Stocks pulling back, dollar/yen a bit lower.
–Today’s news includes Housing Starts expected 1020k, Jobless Claims 310k and Philly Fed at 16.0.
