Feb 21. Five year. Auction and calls

–Curve flattened Tuesday as the treasury auctioned 2 year notes.  Red and green eurodollars were weakest contracts on the board, -3.625 and -3.75. Tens rose 1.6 bps to 289.1. Good size buying in EDH9 9700p for 3.5 in size about 50k (OI +34k, EDH9 settled 9741.5 and puts at 3.25).  There were a few other trades which accentuated weakness in reds; fairly obvious from price action.

–The largest trade of the day was a buyer of >50k FVJ 114.5c for 8.5 to 10.5 up to FVM price of 113-26+ (OI +34k, 27 delta, settled 11.5 vs 113-29.25).  The 114.5 strike is right around 2.53% yield of current 5yr which I marked 2.646 at floor close.  The interesting note about this trade was a similar purchase in FV calls on 5-Feb; there had been a buyer of 50k FVH8 115.0 calls for 4.0, when FVH was around 114-15+.  At that time, the March calls had 18 days until expiry, and that very day (as stocks fell out of bed) FVH traded as high as 115-21.  So the calls went 42/64’s in the money.  Now, with March calls expiring Friday, it looks as if the 115 strike will be worthless, with FVH trading 114-07.  However, it’s worth noting that the trade displayed impeccable timing when initiated, and now the guy is buying calls with 30 days until expiration, still about 1/2 a point away, and paying about twice as much.  As my paranoid floor friends would say…’Hey, he KNOWS something.’

–Today we get FOMC minutes from the Jan 30/31 meeting, Yellen’s last.  At that time market indications of inflation were deemed slightly higher.  Also interesting that stocks had just made their all time highs on Jan 26 /Jan 29, before a very slight pullback pre-FOMC.  From a Sunday, Feb 4 interview where Yellen termed stocks as “high” and she also said this: “What we look at is, if stock prices or asset prices more generally were to fall, what would that mean for the economy as a whole? …And I think our overall judgment is that, if there were to be a decline in asset valuations, it would not damage unduly the core of our financial system.”  So Yellen de-emphasized asset values, and I would bet Powell feels the same.
–The minutes will be scrutinized for clues of four hikes this year.  There was a slight language change in the last statement that called for “further” gradual adjustments to rates.  I’m guessing that means…’further gradual adjustments’, but to some people it means “four”.
–Apart from the FOMC minutes, 5 year notes are auctioned today, followed by 7’s tomorrow.  Philly Fed’s Harker speaks on the Economic Outlook at 9:00.
Posted on February 21, 2018 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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