Jan 7, 2014. Everything’s cool in this market…

–Monday featured a flattening curve with red/gold pack spread down 4.25 to 296.  Ten year yield fell about 4 bps to 296. Overall trade was quiet, though there were a few large option packages.
–With both tens and red/gold pack spread hovering around 300 bps, it seems to me that the market has settled into a complacent state. Almost as if it’s in a deep freeze. (See? That’s a joke). The general feeling seems to be that tens can’t really sustain higher yields, and that forward rates are simply too steep.  I’ve been in that mindset before: “Really, how much higher can this thing go?”  It doesn’t matter what the market is, the answer that I’ve personally learned is: “Enough so that it will rip your f**king liver out and drain your account.” Maybe it’s just me…

–The tendency is for green and blue straddles to grind lower.  I’ll continue to focus on green/blue June straddle spread (82^ vs 71^) that settled just 6.5 bps (54.5 and 61).  Total straddle premium of blue is just 12% higher than the green, even though the blue yield level is 60% higher. Not really the way to measure it, but somewhat fits with the market’s misguided theory that nothing can happen at the long end.  In fact, someone mentioned research to me from David Zervos of Jeffries regarding a strategy (spoos+ blues) of buying SPX and Blue eurodollar packs, the thought being that if something bad happens in stocks then the large yield cushion provided by the blues will offset whatever minor bumps stocks encounter.  Who am I to argue?  It’s worked the past few years.  I will only say that I can easily envision a scenario THIS YEAR, where that trade stings on both sides. It’s not that I’m sure that long end yields are going to instantaneously leap to victory, say around 3.4%.  It’s that the market isn’t keen on pricing that possibility.
–And if I were to argue, it would be along these lines. “Dude, the whole premise of your trade is unlimited QE.  They are beginning to taper.  There are concerns growing like green shoots globally that QE has risks.  Even Japanese stocks are a bit more tentative and JGB’s appear to want to probe higher yields.”  Well, that’s how I would start anyway…

Posted on January 7, 2014 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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