Aug 12. Yields rise, but still depressed

–Yields pushed higher yesterday with the ten year up 6.6 bps to 157.3, as auctions concluded with the 30 yr.  Crude oil more than reversed Wednesday’s sell off on Saudi comments that suggested support for the market; crude looks set to close at the high of the week.  Eurodollar calendar spreads bounced from extremely depressed levels.  For example, Dec’16/Dec’17 rose 3 bps to 15.   Attached is the Nov/Jan Fed Fund spread which settled at 8 in a 7.5/8.0 market, near a new high.  This spread isolates odds of a Fed hike at the Dec FOMC, now around 30%.  In an interview with the Washington Post, SF Fed’s Williams was asked “…does the gradual path of interest rate increases include any this year?”  Williams: “In my view, it does.” No mention in this interview of already tightened conditions due to the increase in libor.

–Large buyer yesterday of 2EU 9850p for 1.5 bps.   Seems like a long way with EDU8 9884.0s.   However, in the beginning of the year the first contract to the ninth was over 100 bps and in May it was 60 bps.  Given libor at 80 bps (without particularly large odds of an actual hike) and a spread of 60, the contract would trade 9860.   So it’s not much of a stretch to think that strike could be breached in the next month.

–Chinese data softer than expected but little reaction.  Today’s US news includes PPI expected +0.1 with Core +0.2.  Retail Sales +0.4, Less Auto and Gas +0.3.

–Yields pushed higher yesterday with the ten year up 6.6 bps to 157.3, as auctions concluded with the 30 yr.  Crude oil more than reversed Wednesday’s sell off on Saudi comments that suggested support for the market; crude looks set to close at the high of the week.  Eurodollar calendar spreads bounced from extremely depressed levels.  For example, Dec’16/Dec’17 rose 3 bps to 15.   Attached is the Nov/Jan Fed Fund spread which settled at 8 in a 7.5/8.0 market, near a new high.  This spread isolates odds of a Fed hike at the Dec FOMC, now around 30%.  In an interview with the Washington Post, SF Fed’s Williams was asked “…does the gradual path of interest rate increases include any this year?”  Williams: “In my view, it does.” No mention in this interview of already tightened conditions due to the increase in libor.

–Large buyer yesterday of 2EU 9850p for 1.5 bps.   Seems like a long way with EDU8 9884.0s.   However, in the beginning of the year the first contract to the ninth was over 100 bps and in May it was 60 bps.  Given libor at 80 bps (without particularly large odds of an actual hike) and a spread of 60, the contract would trade 9860.   So it’s not much of a stretch to think that strike could be breached in the next month.

–Chinese data softer than expected but little reaction.  Today’s US news includes PPI expected +0.1 with Core +0.2.  Retail Sales +0.4, Less Auto and Gas +0.3.

 

Posted on August 12, 2016 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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