Carnage in short rate options

June 6, 2019

–The extraordinary rally in euodollars continues.  In a little over a month, since early May, many contracts have rallied 55 to 70 bps, without an overt ease from the Fed and without any substantial catalyst.  ISM data remains above 50, with yesterday’s services posting a solid 61.2.  There has been no banking crisis.  Corporate spreads aren’t exploding.  No panic in stocks.  Yet, EDH0 was 9857.5 in early May and now prints 9826.5, a rally of 69 bps.   FFF0 has surged from 9775.5 in the beginning of May to 9831 now, a gain of 55.5.  And remember, at 9775, the market was ALREADY projecting better than 50/50 odds of an ease by year-end.  This contract printed 9836.5 yesterday, pricing three 25 bp cuts by year end.  Trump may not know it from stocks, but interest rate markets are in the process of exerting severe pressure to make a China deal.  Or, perhaps that’s the wrong interpretation….perhaps the market just wants inflation at any cost, and perceives the correct path to be slashing funding costs. Crude oil has not cooperated, falling nearly 20% since the start of May.  I’m becoming so bearish on the long bond that my only choice is to avert my gaze.   

–All back eurodollar spreads are now making new highs (from reds back).  Red/gold pack spread closed at 43 yesterday, +2.75, a rally of close to 25 bps since the beginning of May.  Eurodollar option volume has been heavy.  However, several option market making groups have apparently stopped doing business due to the carnage.  The liquidity of 1/4 bp markets that was taken for granted is not likely to be available in the near future.   There has continued to be large buying of call spreads, for example, EDN 9800/9812cs settled 3.0 yesterday, trading over 100k with open interest increasing by nearly 70k in each strike.  I find these levels ludicrous.  However, if the first “insurance” cut occurs at the June FOMC, then anything’s possible.  

–Employment data tomorrow following weak ADP of only 27k yesterday.

Posted on June 6, 2019 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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