April 6. Five year treasury shorts have no friends

–I used to have a friend on the trading floor, Jimmy, who hailed from a farming community and used to write a grain missive, and it would have folksy sayings in it like, “Corn has no friends here” and then would go into some great technical market details.  Well, all I can think of at this point is, five year treasury shorts have no friends here.  It’s not that price changes at settlement were all that large; the five yr yield was only -1.2 to 186.5 and tens were essentially unchanged, closing just over 235. The issue is that the market, with the help of Fed minutes, is shifting to the idea of balance sheet reduction, which could negatively impact longer dated assets including stocks, which keeps fives (and shorter mats) well bid.  And of course, that’s not the only risk to the ‘Trump rally’ as a White House shake-up involving Bannon occurred and a more proactive stance with both N Korea and Syria is on the table. All this just prior to a meeting with China’s Xi, where both sides could use some positive press.

–In any case, open interest in treasuries is strongly suggesting new buyers, right at the top of the [price] range.  Open interest increased 90k in FV, 51k in TY, and 12.5k in US, some fairly large changes against a backdrop of new lows in all near euro$ calendar spreads, (even though ADP was robust at 263k).  For example, the peak one-yr spread is still EDM7/EDM8, but it fell 2.5 bps to a new recent low of just 41 yesterday, barely one and a half hikes over a year.  The peak in this spread was over 60.  The spread that edged to a new HIGH was 5/30, which I marked at 113.7.  A couple of days ago I put out a chart showing that 105 is a critical level, and thought that another hike would cause a cascade lower.  But the shift from tightening with Fed Funds to tightening with the balance sheet is a different dynamic.  So, as the spread from reds to greens (2nd to 3rd year) makes a new low under 30 bps, red/gold is holding and likely worth trying to buy.  In terms of a nearby hike, July FF settled at a new low of 9894.5, which I assign as 63% probability of a June increase.  Further back, all ED 3-month spreads apart from June7/Sept7 are trading in single digits.

Posted on April 6, 2017 at 5:22 am by alexmanzara · Permalink
In: Eurodollar Options

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