August 21. Fed minutes from July push yields a bit higher

Fed minutes sparked a sell off in interest rate futures as discussion about rate normalization and “lift off” caught the market’s attention.  Tens rose 2.5 bps to 242.8.  On the dollar curve, greens and blues were weakest, -5.625 and -6.125 respectively.  Going into the Jackson Hole conference which will emphasize labor markets, this line from the minutes could be important: “Many members noted, however, that the characterization of labor market underutilization might have to change before long, particularly if progress in the labor market continued to be faster than anticipated.”  Yellen wants to see real wages increase, and may stress the underutilization theme as a push back to some on the committee.
–In the staff review: “The median dealer continued to see the third quarter of 2015 as the most likely time for the liftoff of the federal funds rate from the effective lower bound, although, relative to the June survey, the distribution of the modal expected time of liftoff became more concentrated around the third quarter of 2015.”
–Before the minutes were released, there appears to have been some large position adjustments.  Exits of red and green Dec midcurve put spreads vs calls (sold puts/bot calls) and a new buyer of 80k red March midcurve 9850p for 10.5 and 11.0 (approx 32 delta and 27 bps out of the money).   While these puts rose 77.5k in open interest, Green Dec 9762, 9775 and 9787p combined lost 40k in open interest.  In terms of timing, it makes sense to swap into March, as Dec midcurves only have 114 days left versus 205 for March.  It’s also reasonable to move a bit forward on the curve, as the back end appears to expect only limited tightening and continued low inflation.  Again I would note new lows in Crude, now below $93 and down over 7.5% in a month and a half, and a slight new low in ten year treasury to tip spread, just under 218 bps.

Posted on August 21, 2014 at 5:24 am by alexmanzara · Permalink
In: Eurodollar Options

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