Aug 25. Often wrong, NEVER in doubt

–Both Yellen and Draghi speak today, with Yellen setting the pace at 10:00 EST.  Recently it seems as if the Fed is going through a period of self reflection, with the only conclusions being that R* has come down (belatedly aligning with the market, which reflected that sentiment long ago), and that the Phillps curve isn’t working too well.  The only one who seems to have stayed on a pretty steady path is Dudley, who maintains that inflation will work its way higher towards target. Over time.  If Yellen highlights financial stability as a goal, it will likely be somewhat bearish.  However, against that backdrop are some more immediate concerns:  Hurricane Harvey, the debt ceiling negotiations, etc.

–Activity was light yesterday, with yields edging up a couple of bps.  Tens ended at 219.  30 year bonds have settled in around 2.75%.  5/30 yield spread posted a new recent low, closing just below 100 bps.  On the interest rate side, things are sickeningly stable.  For example, friend CF pointed out that the week-1 Sept US straddle was awfully cheap, going as it does, through Jackson Hole and then expiring on the employment report.  I looked at US1U 154.5/155.0 strangle which was quoted late 1’13/1’15.  DV01 is $209.  So a bit under 6 bps for a strangle 2.4 bps wide.  And the question still arises….could bonds REALLY move 10 bps?

–Back to the immediate concerns.  Gasoline was up, oil was down as Harvey confronts Texas.  Katrina created a strong rally in treasuries, which ultimately was short lived.  The debt ceiling seems to be creating a bit of weakness in the very front end of the curve, with EDZ7 closing down 1.5 at 9856.5.  There is talk of significant bill issuance once the ceiling is lifted; that may cap the front end over the short term.  Late buyer of 30k EDZ7 9825p for 0.25.

–Finally, in the category of ‘things aren’t always how they appear’ there’s this:

Posted on August 25, 2017 at 5:29 am by alexmanzara · Permalink
In: Eurodollar Options

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