Aug 2. New lows in all euro$ calendar 1-yr spreads…

Aug 2. New lows in all euro$ calendar 1-yr spreads.  The lowest, EDZ11/12 is a mere 22 bps. The unexpected drop in ISM to only 50.9 underscores economic weakness, and deterioration in Italy, Spain spreads could portend dollar funding issues. And of course now that the debt ceiling has passed the house, I’d guess cash mgmt bills will be issued pronto, causing further flattening pressure.

–Red/green pack spread fell about 4 bps to 70.5.  Citi noted that 2/5 treasury spread has broken to new lows, 95 bps…”the curve reflects increasing concerns with the U.S. economy/slowdown.”  BBG estimtes light vehicle sales due today may be only 11.8 million vs 12.5 in first half.

–Today’s news also includes Personal Income and Spending expected +0.2 and +0.1 respectively.

–There is still buying in deferred midcurve call structures.  Fimat rolled from E2U to E2H butterflies and a buyer in blue midcurve calls was also in…the flattener trade is being expressed in every way possible, and I would say that pricing at these levels reflects not just a slowdown, but more of a disaster scenario which I find difficult to fathom.  This move isn’t QE inspired like late summer last year (or maybe it is…) when SP500 was 1100, and EDZ11/12 was 50-55.  This is pure economic malaise, and maybe stocks are even starting to grasp that possibility. Financial turmoil in europe and slowing in China doesn’t help..

Posted on August 2, 2011 at 12:33 pm by alexmanzara · Permalink
In: Eurodollar Options

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