August 17. Eurodollar calendar spreads are wrong

–Fed minutes today.  Some analysts think that this release is important as it could provide clarity on the Fed’s thinking.  However, recent comments suggest a lack of consistency even within individual members, let alone the entire committee.  For example, in a speech on July 31, Dudley said ‘medium term risks to growth are slightly skewed to the downside’ and that risk management and other considerations “argue for caution in raising US short term interest rates”.   Yesterday he said that a rate hike in September is possible.  Williams had been relatively hawkish, warning that complacency might put the Fed behind the curve, but in a paper released Monday said that perhaps the inflation target needs to be raised, in other words, he’s not so anxious to tighten.  Bullard simply threw in the towel earlier in the year and said forecasts are useless, we’ll simply call current circumstances a ‘persistent regime.’  How are we going to get clarity from the minutes?

–In any case, a relatively strong Industrial Production number yesterday (+0.7) and Dudley’s comments were enough to push yields a few bps higher.   Tens ended at 157.6.  Odds for a December hike rose, as the Nov/Jan FF spread settled at a new high (since early Jan) of 9 bps, indicating 36% chance of a hike in Dec.  October FF traded heavily and settled 9957, down 1 on the day.   The Fed effective rate has been 40 bps, so there’s only 3 bps of premium in the Oct price, call it 10-15% chance of a hike in September.   What’s interesting is that one-year ED calendars are barely budging off their lows, for example, EDH17/EDH18 settled 15.5, up just 0.5 on the day.  I think we’re getting an engraved invitation to buy some of these back month one-year spreads, they’re at least 20 bps cheap (should be in mid-30’s vs mid-teens).  Mr Valentine has set the price.

Posted on August 17, 2016 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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