Oct 25. Rates behaving badly
–Rate futures continue to press lower. Indications of downside fear are gently creeping in. Volume favors downticks, implied vol is firming as market moves lower, euro$ calendar spreads are edging higher. This morning, greens, blues and golds are at new lows (-3.5, -5, -5.5). Curve has been extremely flat so there’s some room to run in calendars. Yesterday, reds to deferred all made new highs. For example, red/green pack spread rose 1 bp to a new recent high of 19.25. However, it has been stuck between 14 and 18 for a month. Red/gold rose 2.5 to 48.875; it’s a new monthly high, but barely 10 bps off the low. EDZ18/EDZ19 spread has seen consistent buying which has been associated with new open interest, settled 23.5 yesterday, also a new recent high.
–There were a couple of large trades yesterday. Most notably a seller on exit of 150k 0EZ 9812/9800ps at 6.5 (6.0s ref 9807), which was rolled into new longs of 75k each: EDM8 9812/9787ps for 5.0 (5.25s ref 9824.5) and EDU8 9800/9775ps for 5.5 (5.75s ref 9816.0). Also, decent two-way trade on EDZ7 9850 straddle at 6.5.
–Late report that Taylor had won a Senate ‘straw poll’ for Fed chief. Caused some selling in fixed income, but elicited little reaction in stocks. I doubt Taylor becomes Fed chair, and maybe that’s also the collective wisdom of stock index traders, but if the Fed DOES shift to a more hawkish central banker, then I would bet Dow 22000 is a lot more likely than 24000.
–Durables and New Home sales today. Five year note auction.
