Oct 18. New lows curve
–Curve again pressed to new lows, with 2/10 just above 75 bps (-1.5 on the day) and 5/30 at 85 bps (-2.50). Red/gold euro$ pack spread also at a new low, now just under 38 bps. These levels are all the lowest they’ve been since 2007. An expected Fed hike in December will bring the upper end of the FF target to 1.5% with a Fed effective of 1.41%, but the curve is tracing out a similar – though less aggressive- path as occurred during the hiking cycle of 2004 to 2006, when the Fed tightened by 1/4% at every meeting, ultimately taking the funds rate to 5.25%. Recall that particular cycle BEGAN with the FF target at 1%.
–Once again there was heavy buying of 0EZ 9787.5p for 2.0, ref 9807 in EDZ8. Over 125k bought; open interest up another 65k. This morning EDZ8 is printing a new low of 9803.5. 0EZ 9812/9800/9787p fly settled 3.0, with the 1×2 at 0.75 and 9787p 2.25. There was additional put buying further out the curve, for example, for 2EZ 9750p and 3EZ 9750p bought in size over 10k each (1.5s ref 9787.5 in EDZ9, and 3.0s ref 9777.0 in EDZ0). Red euro$ straddles rose 1-1.5 bps as the downside trend in prices continues. However, treasury vol remains pinned to recent lows; I marked USZ vol at just 7.0%. USD is firmer.
–News today includes housing starts expected 1175k and the Fed’s Beige Book summary in the afternoon.
