April 19. What’s the point?

–Yields plunged yesterday to new lows for the year, with tens down 7.5 bps to 217.5.  Curve flattened to a new low with 2/10 down 4 bps on the day to 101.3.  Nearly all euro$ calendar spreads made new lows; peak 1-yr spread is EDZ7/EDZ8 at just 33 bps which was down 2.5 on the day.  It feels like a squeeze and that’s the term most people are using to describe the price action, yest open interest continues to rise in 5’s and 10’s, up 77k and 23k respectively.  Clearly, the Fed has encouraged shorts with the constant chatter about raising rates and trimming the balance sheet, with Esther George chiming in yesterday.  While several Fed  officials including Dudley have termed balance sheet reduction as a substitute for rate increases, George apparently doesn’t see it that way and wants to trim the balance sheet on autopilot (after having pointed out all the uncertainties about what the Fed is doing).  She says, “The key challenge for monetary policy today is to unwind this large balance sheet in the least disruptive manner.”  Why is that the KEY challenge?  She only gives two flimsy reasons, to move towards normalization, and to give the market access to more ‘highly liquid and safe securities.’ Huh?  We already have stocks.  Her speech reminds me of my favorite Neal Page quote: “When you tell a story, have a POINT.  it makes it SO much more interesting for the listener.”

–July FF settled 9900, now indicating just over 40% odds of a hike in June.  In mid December of last year just prior to the last two hikes, EDZ7 was 9850-56.  It settled yesterday at 9858.5.  Financial conditions are generally easing rather than tightening.  January 2018 FF settled 9882 or 118 bps vs the current Fed effective of 91, a difference of 27 bps.  The market is looking for ONE more hike prior to the end of the year, not THREE.  Rosengren will likely split the difference today and call for 2 more.  Beige Book this afternoon to summarize conditions prior to the May 3 FOMC.

Posted on April 19, 2017 at 5:24 am by alexmanzara · Permalink
In: Eurodollar Options

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