Feb 26. Curve is throwing a curve

–There are a lot of synthetic steepeners out there in eurodollar options, mostly long nearer calls and selling deferred, but the curve flattened Friday.  EDH8/EDH9 is still the peak one-year calendar but that settled at just 48.5 Friday, down 3.75 on the day.  The front March contract, EDH8, is clearly under pressure so perhaps it’s not worth reading too much into this spread being below 1/2%.  After all, January FF at 9788.5 are 69.5 bps above the current 1.42% Fed effective rate, so that contract indicates close to three hikes for 2018.  The red/green euro$ pack spread closed at 16.25 on Friday, -1.625.  In the beginning of Feb this spread was over 21.5.  Red/gold pack has declined over 13 bps from the high of the month to 29.5.  I have favored being long curve, but the market appears to be thinking that 3 or 4 hikes this year, along with restraint associated with QT, will slow the economy within a couple of years.  So, the back end of the curve may be more responsive to inflation (which I think will surprise to the upside).

–Interesting new trade Friday was a buyer of 60k EDM9 9725p vs sold 31.5k EDZ9 9725p at prices 17.5 vs 33.0.  This is new position, OI +75k and +45k.  Settles 17.25, 44d vs 9733.0 in M9 and 33.0, 53d vs 9718.5 in Z9.  So this trade is a flattener and short the market.  It’s also selling puts on the ‘cheapest’ contract on the board, EDZ9 (cheap in terms of butterflies).

–Powell speaks tomorrow.  Today’s news includes, Chgo Fed Nat’l Activity, New Home Sales and Dallas Fed.

Posted on February 26, 2018 at 5:22 am by alexmanzara · Permalink
In: Eurodollar Options

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