Feb 13. Adjustments back to normal?
–Rates were slightly higher as equities rebounded. Tens rose 3 bps to 285.7. In dollars, greens, blues and golds were down 3.5 bps. It was an adjustment day. Open interest in ESH was -89k. Implied vol across the interest rate curve plunged. For example, On Friday, 3EH 9712^ settled 25.0 and yesterday just 21.5. 2EU 9725^ settled 47.5 on Friday, and 45.5 yesterday.
–On a longer time frame comparison, on Nov 12, there were 33 days until expiration for the front Dec midcurves. ATM straddles were 0EZ 9800^ 11.5, 2EZ 9787^ 15.5 and 3EZ 9775^ 17.0. Currently, with 32 days to go ATM March straddles are: 0EH 9762^ 14.0, 2EH 9725^ 19.5 and 3EH 9712^ 21.5 (of course this is after yesterday’s declines). After adjusting for the higher strikes, premium is barely elevated. As a simplistic example, 17 bps for the blue dec straddle at a strike of 2.25% (9775) is 7.55% (17/225). The current blue march straddle has a strike of 2.875%, and 21.5/287.5 is 7.4%. What is probably a pretty high probability trade…well, I will put that out when I get to the desk. What I will say is this, libor is going away as a benchmark in 2022 and the golds don’t have much in the way of additional premium. In any case, the next month has some potential market moving events: CPI tomorrow, Powell testimony at the end of the month, Italian elections, and run-of-the-mill escalations in military conflicts. I would actually say vol is getting back towards cheap in the interest rate arena.
