Dec 17. 300. “This is where we fight” Red/gold euro$ pack spread

–Light volume yesterday.  The biggest feature was strength of the green pack relative to the rest of the curve.  Red/gold pack spread (new) was up 2.75 as reds gained 1.625 and golds fell 1.125, but green/gold was up over 4 bps as greens rose 3 bps. One year butterfly EDU14/15/16 settled at -64.5, close to an all time low for that slot.  (I believe the lowest I’ve seen a one year fly is -66.5).  The butterfly goes more negative as the back one year spread widens relative to the front.
–In my opinion, this price action fits with the idea of a small taper with stronger forward guidance, perhaps by a lowering of thresholds, at tomorrow’s FOMC.
–As noted previously, the high for the red/gold pack spread this year has been just below 300, and the new red/gold pack spread is currently at this level (closed just above 298 yesterday).  What I haven’t noted is just how important the 300 bp level is, as it was tested in 2009, 2010, early 2011 and this year in the summer and now. (Chart attached in below post).  A breach of the 300 level should cause a rapid scramble to 340-350.  After September’s “non-taper” the spread fell back to 250.  Would seem to argue for a position of long gold puts hedged.
–Probably the one year fly referenced above would make brand new lows at the same time.  In other words, position exits from ALL TIME EXTREMES  at a time of year where markets are generally on the thinner side could cause violent moves.
–Today’s news includes CPI expected 0.0 with Core +0.1.  Treasury kicks off auctions with the two year note.

Posted on December 17, 2013 at 5:36 am by alexmanzara · Permalink
In: Eurodollar Options

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