July 26.
July 26. Light volume Friday. The curve steepened as stocks rose; bond yield edged back above 4% to 4.01 while tens remain just under 3%. 2/10 treasury spread rose about 3 bps to 240, red/gold pack spread was up a bit over 4 bps.
–In the past few days there has been quite a bit of buying of EDZ0 9925p and EDH1 9912.5p. On Friday I think about 30k and 20k respectively by Citi/SSB. The interesting thing about this buying is that while some was done earlier in the week prior to european stress test results, it continued Friday even after results were announced. The buying appears to be new positions, (increased open interest), even as dollar libor setting has edged down below 50 bps recently. European funding costs continue to rachet up daily, as evidenced by EUR libor settings. Is there a good reason for this put buying?
–As treasuries sold off, implied vol rose. However, implied vol actually was a bit softer in green midcurves. Not only that, but green sept (E2U) has absolutely no downside skew, which I think is mispriced. For the most part I think large market makers are simply trying to defend put positions with low settles that might not be available for purchase. But if the guy buying front puts is right, then I would certainly think downside greens should be more expensive, especially as curve steepens.
–New Home Sales today expected 310k.
