Dec 10. Signs of economic improvement

Dec 10.  Many large interest rate option trades trades:  TYH 125/127c spd UBS paid 13 for 45k (new).  EDM1 9975/9987 c spd cab paid for 30k. EDZ1/EDH2 spread sold in size of 90k from 18 to 17 (appears to be exit). There has been a seller of about 40k EDU1 9937^ in the last two days from 45 to 41.5; yesterday there was also a buyer of about 50k EDU 9962c for 3.5 (straddle and call buying is new).  The bias favors a market that grinds higher (at least in case of EDU trade).  
–Flow of funds show household sector that is still deleveraging, though probably mostly forced.  Household debt growth -1.7%, but that’s a slower rate of decline than the last 4 qtrs…signs of improvement.  Also total business debt growth was +1.7%, the best showing in the past 8 quarters.  If tax stimulus gets through congress the economy will surely get a jolt of growth, which probably points to higher rates and even higher calendar spreads.
–Red/green euro$ pack spread made a new recent high of 92 bps.  Getting back to a more “normal” level.  The first four months of the year the spread averaged 120-130 bps.  The latter half of the year it has generally been below 100, with recent lows in November near 50 bps.

–When taken together (one year calendar spreads widening, and front end option call positions), it suggests the Fed will err on the side of easy policy in 2011, but the market will be anticipating stronger growth in the future.
–December midcurve option expiration today.
–Today’s news includes Trade deficit, expected -43.8.  Michigan Sentiment expected 72.5 vs 71.6 last.

Posted on December 10, 2010 at 4:33 am by alexmanzara · Permalink
In: Eurodollar Options

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