Jan 6. China’s not selling treasuries?

–Employment data today with NFP expected 175-180k and earnings +0.3% which would bring the y-o-y increase in wages to 2.8%.

–In advance of this data treasuries staged an impressive rally, with a surge in open interest (according to prelim data) across the treasury complex.  For example, TYH open interest gained 43k and FVH was up 37k.  The early notable feature however, was bearish, buying of 70k TYG 122p for 6 to 7, settled 5 ref 124-265, and + 40k TYG 123p for 12-16, settled 10.  Open interest rose in both strikes, +50k and +45k.  In any case, yields plunged by day’s end and the curve flattened.  The ten year yield dropped  8.4 bps to 236.6.  2/10 spread fell below 120, to 119.2 at futures settlement time.  Red/gold euro$ pack spread dropped nearly 2 to just under 75 bps; this was the 4th consecutive decline.  The spread was above 91 in mid-Dec.

–China is apparently allowing exorbitant money market rates to choke yuan shorts.  Someone must have also alerted the monetary authorities that the surge in bitcoin was a reflection of instability in China’s financial architecture, so sell orders have crushed that market over the last two days as well, from around 1100 to 920.  It must be a pretty fun job…”sell until I tell you to stop.”  On the other hand, if those are the methods being used to shore up the yuan, it means that China is NOT selling USD reserves, which means less pressure on US treasuries, which translates into, BUY, MORTIMER, BUY!!  In any case, that’s how it traded.

–With respect to the ten year yield, pre-election it was 178, and then of course soared to 259.3.  The low of the year was post-Brexit in July at 136.  From the July low of 136 to the high of 259, 0.38 retrace is 212.   The post election move of 178 to 259 has 218.5 as the 50% retrace.  The point is that this rally could continue to 212-218 and still be a bear market.

Posted on January 6, 2017 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

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