Dec 3. Sliding into the end of the year prepared for higher US rates

–Interest rate futures trade heavy going into the employment report, as ISM beat at 57.3. New highs made in deferred one year spreads, for example EDH16/H17 rose 3.5 bps to 112.  Peak one-yr spread is EDM16/M17 at 114; peak for the year has been 122.  The rise in back month spreads has caused futures butterflies to make new lows. EDM14/15/16 set a new low of -62.5, nearing the lows set for any one-year fly which was in Aug 2011 at -66.5, being the 4th, 8th, 12th qrtly, which currently corresponds to EDU14/15/16, now at -60.5. The move makes sense fundamentally as forward guidance holds funding rates *expectedly* low thru 2015, with rate hikes afterward. So, the nearer spreads remain controlled, the backs widen. However, it seems a bit stretched at these levels.  For all the talk of the Fed losing credibility, the euro$ curve accepts the low rate pledge thru 2015 as gospel.
–In treasuries, implied vol is making new highs on the sell off, however there has been some selling of 123 puts and lower strikes on ratio trades.  The 123 strike in TYH is about 23 bps away, or just above 3% on current ten year.  Trades seem to reflect the viewpoint that we can test 3% or a bit higher, but not sustain.  On the other hand, red/gold euro$ pack spread at 292 (+7.25) is within whisper distance of new high for the year (298).
–Gold and silver nearing lows for the year set in summer when the Fed had prepared the market for tapering.  Copper holding a bit better, but the trend is the same.  The year’s low was around 3.05 on March contract, now 3.17.  Stocks, for now, are oblivious.  To everything.
–BBG: Yuan Passes Euro as Second-Most Used Trade-Finance Currency.  And another BBG article mentions that in Japan, “Regular wages excluding overtime and bonuses fell 0.4 percent in October from a year earlier, a 17th straight monthly decline, according to labor ministry data released today.”  Central banks everywhere have seen that QE helps financial assets, but the linkage to wage growth is broken (if it was ever there).  Japan’s theory of “It just wasn’t BIG enough” is now being tested, but still isn’t spilling into wages.

Posted on December 3, 2013 at 4:40 am by alexmanzara · Permalink
In: Eurodollar Options

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