Aug 26. Goin’ to Jackson (Hole)

–Yellen is the big event today.  Eurodollar contracts pushed lower in anticipation with reds down 2.75 and greens down 3.375.  I saw a few news sources saying that odds of a Fed hike had jumped to 1 in 3, but I calculate 25% chance with Oct Fed Funds settling at a post-Brexit low of 9954.5.  In any event, odds for a hike prior to year end are over 60% with Jan FF settling 9944.5.  I would also note a new high in Sept/Dec eurodollar spread at 6 bps.

–Though economic data has been mixed at best, I think the tide inside the Fed has turned and that Yellen will lean to the hawkish side.  (Tide has turned given Fischer saying the Fed is much closer to both jobs and inflation goals, discount rate increase requests up to 8 out of 12, etc).  The question of course is how will the curve react?  I think the immediate response to hawkish comments might be a slight flattening, but ultimately the curve will steepen.  However, treasury call protection occurred yesterday, with a new buyer of nearly 30k TY Week 1 Sept (expiration on unemployment date) 131.5 calls for 23.  The 20 delta call buyer with a clip size of just over 7k a day was also back, buying TYZ 134c for 25 covered TYU 132-06.  There was also a late buyer (new position) of 8k TYV 131 straddle (settled 1’30).

–An interesting post citing Fasanara Capital notes that 12 month libor is at essentially the same rate as ten year treasuries, signaling headwinds for US banks, given increased funding costs and a lack of curve.  Tens closed yesterday at 157.5, +1.7 bps.

Posted on August 26, 2016 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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