Jan 29. FOMC aftermath. Oil price drop may be “transitory” but strength in the dollar isn’t

–Yields plunged after yesterday’s FOMC announcement with tens down over 10 bps to 172.2.  2/10 treasury spread made a new low of 122, down over 6 bps.  Red/green euro$ pack spread fell 4 to just 55.75, another new low.  The peak one-yr euro$ calendar spread is still EDU15/EDU16, but it has fallen to 75.5, down 6 yesterday, though holding just above the recent low of 73.  The 30 year bond yield plunged to a new low of just 229.
–Although interest rate futures made new highs, implied vol was subdued.  For example, early in the day the March Ten Year (TYH) 129.5 straddle was trading 141, and then settled in at 138/140 in the morning.  Just after FOMC when TYH was trading 130-04, there was a seller of the 130 straddle at 134.  As we closed futures at 130-15, the 130.5^ settled at 140.  Similarly, TYM 129^ traded 324 at the open; TYM 130^ settled 320.  Previously, moves to successively higher at-the-money strikes were associated with higher absolute straddle levels…skew is fading.
–Crude oil made a new low yesterday, closing at 44.45, down 178.  This morning the Aussie $ is making a significant new low, with the dollar generally firmer against everything, as Asian nations take steps to weaken their currencies.  The Fed still insists that lower oil prices are transitory, and I suppose in looking at the crude oil futures curve they have a point: while the March contract is 44.50, September is over $6 higher around 50.70.  However, the NOT transitory part of the equation is the strength in the dollar, which works to import deflation to the shores of the US.  Continued thoughts of a mid-year “lift-off” in the fed funds rate combined with overtly deflationary tactics of exporters appears to be a longer term dynamic.
–News today includes Jobless Claims expected 300k.  Treasury auctions 5 and 7 year notes.

Posted on January 29, 2015 at 5:22 am by alexmanzara · Permalink
In: Eurodollar Options

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