Jan 18. Renewed BEARISH sentiment in US treasuries

–Important sentiment change yesterday. Strong housing data and a large drop in Jobless Claims sparked initial selling in interest rate futures, and a weak Philly Fed was virtually ignored. There was massive long liquidation in midcurve call spreads vs short puts. Greens closed down 6.75 bps as call spreads were sold and puts bought. Near the end of the day there was a buyer of 30k TYH 129/130 put spreads for 7, covered futures up to 131-25.5, (new position). EUR/JPY exploded 2.5 big figures to new highs. Weakness in yen is easily the biggest theme of the year and is a risk invitation. Stocks rallied to 5 year highs. ZeroHedge notes that the catalyst for a move to devalue yen: “Japan’s balance of trade has turned decisively negative for the first time since the Oil Shock of 1980…”
–I don’t think the data points to a particularly strong US economy even though I think the recovery in US housing prices is hugely important. But I do think that there’s about a 25% chance that yields in the US long end reset quite a bit higher over the near term with tens 2.40 to 2.50. Red/green pack spread at 32? Got to 60 last March. There are fairly low risk ways to express long calendars with options. Note that vols immediately firm up on sell offs, the market fears the downside.
–It may seem contradictory but european peripheral yields also have a chance to move higher. Not currently ‘peripheral’ but France has recently moved from below 2% to 2.18. Spain’s ten yr is almost perfectly negatively correlated with EUR recently; as Spain’s yield declined through the latter half of last year EUR strengthened, however, that strength poses huge economic problems for the EU that could easily cause renewed spread widening. But this time it may NOT lead to buying of US debt, as Asian stimulus is an overwhelming factor.

Posted on January 18, 2013 at 5:23 am by alexmanzara · Permalink
In: Eurodollar Options

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