Feb 9. “Hey, are you guys playing cards?”
–Unambiguously strong employment data caused yields to jump Friday, with tens up 12.6 bps to 194. Belly was weakest with fives up 16.8 bps to 146.5 and the green euro$ pack down over 21 bps. The peak one-year euro$ calendar moved forward to June’15/June’16 at 85.5 bps, up 14 bps on the day. Still well under 100…
–Given that three month libor has been setting around 25 bps, the June’15 eurodollar contract at 9957 indicates about 70% odds of a 25 bp hike at the June FOMC. Near Fed Fund contracts have been around 9988 (or 12 bps) so July FF at 9975 indicate a bit better than 50/50 for a hike in June.
–With stronger data, (consumer credit Friday also showed a nice bounce in revolving debt), it’s easy to make a case for the Fed to lift rates from zero. Many are still marveling at the difference between where the market is pricing forward rates and the substantially more aggressive path the Fed is communicating about forward policy, even over the relatively short term. But while the Fed takes note of problems in the rest of the world, and always reassures that they can handle any fallout IF something bad happens, investors have to actually price risks in the rest of the world…including the hardened stance between Greece and the EU (both all-in), an escalation of military activity in Ukraine, deterioration in China’s numbers, the oil price plunge and associated deflationary pressures. There are at least four big poker games going on. The Fed is watching on tv from the relative safety of the living room sofa. But Yellen will have the chance to play her cards at the scheduled Humphrey Hawkins testimony on Feb 24-25.
–This week features treasury auctions of 3, 10 and 30 year, starting with 3’s tomorrow.
–In terms of pricing of eurodollar options, it’s somewhat interesting to note that while greens had the biggest price move (reds -18.625, greens -21.25, blues -19.25 and golds -9.75), blue midcurve straddles are higher than greens in terms of absolute ticks. For example, 2EH7 9825^ settled 27.5, while 4EH9 9762^ settled 29.0. All blue straddles are 1-2 bps higher than greens. There was a trade on Friday that’s an apparent play for a shift in volatility to nearer contracts: Bought 8k 0EJ6 (April expiration on EDM’16 underlying) 9875 straddle 28.5s vs Sold 3EH8 (March expiry on EDH’18) 9787.5 straddle 29.0s, for 0.5 to 1.0 credit. The long straddle has an extra month of time value, and is arguably in the part of the curve that should have much more “play”. This trade also circles back to the idea that while the Fed may exert influence on the near term path of rates, the longer dates are much more market driven, and the market doesn’t hold the same terminal rate view as the Fed does.
