Aug 7. Stocks stabilize but treasuries suggest more trouble ahead

–Yields continue to press slightly lower in the US with tens closing down 1 bp at 247 yesterday, trading 246 today.  German schatz (2y) trades 0% and briefly dipped negative in front of the ECB this morning.  German bund is 108.  Aussie at a two month low against the dollar as unemployment hit a 12 yr high. A reflection of China slowdown?
–Not much change in dollars as green, blue and gold packs all closed +1.5.  There was heavy activity in EDM5 puts yesterday, a buyer of 20k 9912/9887p 1×2 for 0.5 and a buyer of 50k 9900/9875 p spread for 1.5 and 1.75.  Heaviest open interest in June puts is 9950p with 284k open, futures settled at 9945.  There continues to be a buyer of Dec FV year calls.  A few days ago paid 7 for 30k FVZ 120c and yesterday bought the 120.5 strike for the same price, 6 to 7, in the same quantity.  Both new positions. Roughly 20 bps per futures point, so 120.5 strike is around 40 away, and current 5yr yield is 165.  But 1.25 yield doesn’t seem like that much of a stretch given bund sub 110.  Though stocks rebounded from early lows yesterday morning, there is still substantial skittishness.  Themes I continue to see are 1) stretched valuations in corporate bonds, even with the recent pullback, and 2) reduced liquidity as the financial infrastructure has been regulated away.
–Crude oil testing lows from early May at 9667.  I read this morning that Brent futures curve has gone contango today as near contracts have been heavily liquidated after the July run up on geopolitical tensions.  WTI curve still backwardated.  BBG chart of the day.  Dollar strength, spec liquidation and the outlook for a slower global economy all at work.

Posted on August 7, 2014 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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