Curve getting ahead of Fed

October 6, 2020

–Yields surged yesterday, led by the long end.  Thirty year bond up 8.4 bps to 1.564% in front of Thursday’s auction (3s and 10s today and tomorrow).  The ten year note rose 6.6 to 76 bps.  SPX rose 1.8% as Trump strolled out of the hospital.  Polls show Biden well ahead in the election race, but if stocks are correlated to the economy, and if stocks rally with Trump, and if the economy is a major voting issue, then the election outcome isn’t all that certain.

–The curve steepened with 5/30 ending at a new high for the year at 124 bps (on end of day basis; it had ticked 128 earlier in the year).  2/10 closed up 5.2 at 61.5, shy of the double top at 68.  Red/gold euro$ pack spread rose over 4.5 bps to 49.75, but highs of the year are around 62.  Closer in on the ED curve, all near one-year calendars made new recent highs.  EDZ0/Z1 closed at -1.5, up 1.5 on the day and the only inverted spread.  Every spread following is successively higher, though the highest spreads are only around 20, less than 1/4% that would be thought of as an initial Fed tightening.  

–I would also note that EDH1/EDH2 rose 1.5 to positive 4.5 (9979.5-9975).  On the Fed Funds curve, FFJ1/FFJ2 is negative 3.5 (9994-9997.5).  I suppose this just reflects a positive sloping libor/ois curve, but it might be worth considering long FF calendars if market sentiment has turned.

–There is a continued buyer of EDU22 9975/9962p 1×2 for -0.5 (settles 14.25 and 7.5, 25k traded).  This and similar trades have made cheap options in reds even cheaper, and a response came in the purchase of 60k EDM22 9900 puts for 2.0.  I know a 1% strike seems insurmountable, but just remember we started this illustrious year with a FF target of 1.5 to 1.75% and the June’22 expiry is 615 days away.

–On the other hand, Powell is scheduled to speak about the economy this morning, and is sure to hammer home the idea that the Fed is not moving until inflation is well above 2%.   

Posted on October 6, 2020 at 5:23 am by alexmanzara · Permalink
In: Eurodollar Options

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