July 23. Wait until next year…for rate hikes that is
–Yields slipped as CPI was slightly lower than expected. Green pack was +3.25. Ten year yield ended at 246.4, almost 1 bp lower. EUR made a new low for the year and is now around 134.60. In related news the NY Fed is targeting Deutsche Bank for poor risk management.
–The big trade yesterday was in EDM5 puts as Fed hikes are expected next year. There was a large buyer of EDM5 9950/9925p 1×2 for 0.5. There are 3 FOMC meetings next year prior to June expiration on 15-June 2015; the June FOMC (4th of the year) is on June 17, 2 days after expiration. Volume in all June puts was 286k, open interest was up 153k, with 70+ added in both 9950 and 9925 puts. Recall that there had been a large buyer of 9900 puts for 4.0-4.5 a couple of weeks ago (OI in 9900p 143k). The buyer of the 1×2 probably now has the 9950/9925/9900p fly on for 4.5 to 5.0.
–If there is certainty of a Fed target of 50 bps by the June’15 FOMC then the 9950 puts will, of course, be in the money. August’15 Fed Funds (FFQ5) settled yesterday at 99.535 or 46.5 bps. This contract cleanly captures 5 FOMC meeting from next year, the 5th meeting being on July 29. Might be worth selling FFQ at 53.5 vs selling 2 EDM 9925p at 8.0, though there’s more upside risk exposure than on the 92/95p 1×2.
