Aug 22. Jackson Hole. Anticlimactic before it even starts.

–Yellen and Draghi speak at Jackson Hole today.  There is a lot of focus on whether Yellen can be dovish enough to justify current yield levels.  But the minutes this week have already acknowledged the idea that dealers are expecting a hike by Q3, and the Fed is discussing operational issues related to rate increases.  Back month euro$ calendar spreads are not widening. (Highest one year spread remains EDZ15/EDZ16 at just 103). The market is telling us that rate hikes will almost certainly be limited.  Even if Yellen isn’t as dovish as expected, bond bears are likely to be disappointed.   And when Yellen is done, Draghi will confront the mess that is Europe.  Recall that ECB stress test results are due right around the corner in October.  And dollar strength along with yield differentials still support a bid in US treasuries.
–A couple of large positions taken yesterday also reflect the idea of a gradual curve roll forward without much drama.  There was a seller of 30k Short Sept 9925 straddles with Green Sept 9812/9825 strangles covered 9824 in EDU6, from 20 to 18.5.  Three weeks until expiration.  There was also a new buyer  of 40k Green Nov 9812/9837/9862 call flies for 2.  The spread between EDU6 and EDZ6 is 25.5 bps.  If things stay pretty much the same, the roll will put the fly right in its sweet spot between the low and middle strikes, and the decay of Sept midcurves will almost surely pay for initial outlay.
–Treasury option expiration today.  Watch out above.
–One other thing to note is that the administration is preparing the public for a much bigger confrontation with ISIS.  Odds of a terrorist threat increase, which means increased security measures right down to the local level.  Which in turn implies at least some degree of suppression of rights.  Perhaps it’s a stretch to connect something like ISIS with the idea that a fragile situation in many large US inner cities could boil over.  But it’s something to perhaps keep in mind?

Posted on August 22, 2014 at 5:40 am by alexmanzara · Permalink
In: Eurodollar Options

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