Dec 28. A year-end for the books

–Massive late rally in stocks saw ESH surge from 2400 to 2475 just after the 7 year auction.  Further gains this morning with a current print of 2510.  Yields responded mildly to the monster rally, yet still finished much lower on the day with tens down 5.2 bps to 274.3.  The Japanese ten-year has slipped below zero again this morning.  Implied vol firmed across the curve, as the prospect of large unexplained price changes necessarily filters into option premium.

–Near eurodollar calendar spreads notched new lows, with the nadir moving forward to EDU19/EDU20 wihich settled -18.5.  EDZ9/EDZ0, which had previously been the lowest, settled at  -15.0.  The market appears to be thinking the Fed will move fairly aggressively to contain damage, not necessarily through an ease in FF target, but through a cessation of balance sheet reduction.  

–Most importantly, the longer part of the curve steepened.  Once again reds led the way higher: reds +7.375, greens +7.125, blues +6.625, golds +5.625.  There was a new buyer of 40k 0EJ 9800/9825 call spread for 2.5 ref EDM0 9747.  Red/gold pack spread new high at 22.25 bps.  Steeper curve should be welcomed by the financial industry.  

–Market forecast of tightening in 2019 is ZERO.  January’19/January’20 FF spread is -1.0 (9760 and 9761).  April’19/April’20 (just after the March FOMC) is -6.0 (9760 and 9766). 

Posted on December 28, 2018 at 5:13 am by alexmanzara · Permalink
In: Eurodollar Options

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