Might want to hedge that…
December 29, 2021
–Yields little changed Tuesday with tens at 1.477%. What is somewhat interesting is that even though volume across markets was quite light, open interest in FV was up 61k and in TY was +35.8k, rather large jumps. I might be off base, but would attribute the increases to yesterday’s five-yr auction and today’s upcoming seven-yr auction. My interpretation is that, without the unwavering QE bid from the Fed, perhaps the private market, which cares about price, finds it prudent to place hedges on new supply. If that’s the case, there are likely significant implications for yields and volume in futures going forward. I would also surmise that vol stays somewhat better bid in the absence of the Fed.
–A couple of other notes: 2EH 9800p were sold on exit at 5.0 covered 9835, 20k. Settled 4.5 vs 9837 in EDH’24. Secondly, there was a sale in EDZ2 9900 straddle at 49.5 yesterday. On December 15, the day of the FOMC, the straddle settled 56.5. The next day someone blasted out ~40k from 51.0 to 50.0. Since then it has been 50.5 to 51.5. Yesterday it settled exactly 50 vs 9894.0. So breakevens are 9850 to 9950 with a sweet spot of three rate hikes by the end of next year. For added context, EDZ22 9850/9950 strangle settled 15.5, 5.25 call and 10.25 put.
–Finally, EDH2/EDM2 three month spread edged to a new high of exactly 1/4% or 25 bps. For comparison’s sake, EDM’23/EDM’24 one-year calendar settled nearly the same level, 25.5. The market is pretty confident about next year, but growth and inflation in the out years don’t have much play.
