Dec 21. Is back end of dollar curve too flat?
–Though volume was light and net changes relatively small, interest rate futures continue to trade heavy. The ten year yield rose 3 bps to 256.4, and 2/10 spread notched a new high at 134.4. Eurodollar contracts were down 1 to 2 bps across the curve, and with sightly lower prices came firmer vol. Someone is looking for an interesting end of the year, as TY week 5 (expiring Dec 30) 123/121.5 put spreads were bought 10k. New position, settled 19 ref 123-04. This Friday’s 123 straddle (TYF expiry) settled at 30, and week-5 settled 52. Though economic data might be sparse, a combination of thin markets and uncertainty in the Italian banking system almost makes next week’s straddle seem cheap (for those who will be hanging around watching).
–On the eurodollar curve, the red/green/blue pack butterfly settled at 16.25…a fairly robust level. Red/green (these are one-year spreads, 2nd to 3rd year) settled at 43.25 and green/blue (3rd to 4th) at 27.0. If forced to make a choice I think I would prefer buying green/blue spreads near 1/4%. Though current perceptions are that the Fed will be more aggressive over the near term, that’s no where near a certainty. Additionally, straddle spreads between atm green and blue midcurves indicate healthy fear of more volatility further out the curve. Blue atm straddles are 5-7 bps higher than greens. For example 2EM 9775^ settled 53.5 and 3EM 9737.5^ settled 60.5. I suppose the point is (if I have any point at all) is that both calendar spreads and vol spreads have loosened up quite a bit given moves post election and post FOMC.
