Dec 7. Diversity of themes
–Long end of market remains relatively firm. Ten year yield fell 2.8 bps to 232.8; 2/10 notched a new low at 52.6. Last Friday’s spike rally associated with the Trump/Flynn news was eclipsed in USH…but no so in TYH or shorter maturities. On the bond rally there was an opportunistic put buyer: USG7 153p bought in size of 12k, mostly at 1’05. This put settled 1’11 ref 154-02 with 40 delta. The ten year swap spread finally went positive this month for the first time since Q3 2015. The 30 yr swap spread is also at its highest level since Q3 2015, closing at -20 bps (low this year was in January at -52). At least part of the move is credited to pension fund demand for the long end before year end. While implied vol was firmer mid-day, after the bond put buyer was done, vols generally eased into the close.
–While copper stabilized after being thrashed on Tuesday, yesterday it was oil’s turn with CLF8 down 1.70 late at 55.92. I would also note weakness in Emerging Mkt index. EEM gapped lower yesterday and closed -1.35%. In futures the same is reflected by MESZ7.
–EUR USD cross ccy basis indicates pressure for dollar funding at year end. EDZ7 final settlement is one week from Monday on 18-Dec and there were still 5 bps of convergence to libor as of yesterday morning. Heavy selling in EDZ7, though open interest didn’t change much (EDZ7 9842.5s). Red/green euro$ pack spread (2nd year to 3rd year) closed at a new low of 12.125 bps. EDM19/EDM20 closed at just 9.5 bps; back end of dollar curve is completely flat.
–Some large and interesting option plays yesterday. Buyer of 40k EDJ 9825/9837c 1×2 for 0.5 with 0EH 9812/9825/9837/9850 c condor for 1.0. The April call 1×2 would suggest no Fed hike in April. In terms of the call condor, 0EH 9812/9825 c spd settled 1.25; probably can pay that this morning and omit selling the upper call spread at 0.25. There was also a new buyer of 50k 0EM 9850c for just over 1 bp. One participant termed them the ‘Jerusalem calls’ as Trump stirred the mideast pot with plans to move the US embassy to Jerusalem.
–One last note concerns ECB purchases of corporate paper. It was widely reported yesterday that Steinhoff bonds of 2025 are sitting on the books of the ECB (from par) and plunged to 60 cents in the last couple of days. Likely of no consequence to the portfolio, but it sharpens the focus on just what Central Banks should be buying…
