July 16. Flatter curve after Yellen
–The curve flattened hard late in the day after Yellen’s comments. 5/30 treasury spread notched a new recent low of 167.5 (-2 bps). Red/gold eurodollar pack spread plunged 6.25 to 208, a new low for the year, as the red pack was down 5.0 and golds were +1.25. 2/10 remains at lower end of range at 207. The market is signalling that any tightening will tilt the economy into a slowdown; it won’t be able to withstand a substantial rate increase. Indeed after Carney’s warning that rate hikes might come more rapidly than market expectations, the 30 bp plunge in futures was met with heavy put selling at the new strike.
–Implied vol in the longer end declined. USU 137 straddle fell from 236 to 226, with vol -0.4 to just 6.8, as futures were essentially unchanged on the day.
–There was a reasonable amount of new back month put buying. For example Green Dec 9775p and Gold Dec 9650p were bought as a package for 27.0, in 20k. (2EZ 9775p 16.25s, 39d. 4EZ 9650p 11.75s, 31d). However, the biggest short positions -in the form of long puts- remains in nearer contracts, with Short August 9912p trading up to 3.0 and having 202k open after buys in the past 3 days of 120k.
–Yellen continues testimony today. Other news includes PPI expected +0.3 with Core +0.2. Industrial Production +0.4. Beige Book released in the afternoon.
–Though it was an outside day in ESU with a marginally lower close, stocks are firmer this morning and ready to test new highs.
