Dec 20. Flows favor USD and US assets…for now
–Curve edged flatter on relatively light volume yesterday, with the ten year yield falling over 5.5 bps to 253.3 and 2/10 treasury spread down 2.7 to 131.3. Red/gold pack spread (new, starting with March contracts) fell 2.5 to 89.125. One of the trades that was supportive of the back end of the curve was a partial unwind of a red/blue option steepener. The original trade was selling 0EH 9837p to buy 3EH 9762p for 3 and 3.5 (though there were a few permutations). On its own the original trade settled 10.5 (16.5 and 27). Yesterday, there was a buyer of 50k 0EH 9837/9787p 1×2 vs selling 3EH 9762p at 15 to 14.5. The selling of blue puts put a bid into the back end of the dollar curve while simultaneously pushing down vol. Green and blue midcurve straddles eased 1-2 bps and, of course, treasury vol also compressed slightly on the rally. EDM7 9875 straddle settled at just 15.5 on selling of the put with 182 days to go.
–Later in the session Yellen’s comments regarding the strength of the labor market (…”best job market in nearly a decade for college grads”) caused a pullback in futures. However, the assassination of the Russian Ambassador to Turkey and a terrorist attack in a Berlin market kept safe-haven treasuries on notice for geopolitical tensions. It’s also worth mention that Italy appears to be preparing for a state bailout of the banking system. All of the above contribute to a stronger dollar and weaker euro, and this morning EUR is below 104. There was also an item on Bloomberg noting that the Malaysian ringgit is at its weakest level since the 1998 Asian crisis and yesterday Indonesia was reportedly considering lopping several zeroes off its currency to maintain some semblance of decency. Probably just a matter of time before CNY breaks 7.00.
–Currently curve is reversing a small part of yesterday’s flattening.
