July 27. Hellllloooo.

–The curve flattened hard yesterday with red/gold (2nd to 5th year) euro$ pack spread plunging 5 bps to a new low of just 138.62.  In treasuries the 2 yr note yield rose 2 bps and the 30yr bond fell 4.  Ten year yield eased another 2 bps to 232.  Reds to greens (2nd to 3rd year) also made a new low just under 62 bps.  The market is on board with the idea of a rate hike, but the back end of the curve has already absorbed the selling pressure and appears to be downgrading both global growth and inflation prospects.

–Ever see the Seinfeld episode where Kramerica wants to develop the oil bladder?  (Kramer and his intern push a big rubber ball filled with oil out of his apartment window to test the idea). Well that’s what happened to crude yesterday…SPLAT!  Down 167 to 4919.  Energy and mining companies are being crushed.  Hi yield ETF’s HYG and JNK both made new lows for the year.  Emerging market currencies remain at or near new lows against the dollar.
–However, the existing home sales data were strong yesterday.  Nat’l Association of Realtors chief economist Yun said “June sales were also likely propelled by the spring’s initial phase of rising mortgage rates, which usually prods some prospective buyers to buy now rather than wait until later when borrowing costs could be higher.”
–I have seen several recommendations recently that argue for buying eurodollar calendar spreads as they have declined to more attractive levels.  I am becoming more inclined to take a contrarian view and look to buy some green midcurve calls.  There are a lot of open option positions that are essentially long the very front end of the curve and short greens.  Trade of most pain might be a hard rally in greens and blues…  On a related note, straddle spreads between atm green and blue midcurve straddles had pushed out to around 3.5 bps in some cases.  These spreads are again narrowing.  For example 2EH 9787^ versus 3EH 9737^ settled at just 1.5 (59.0 vs 60.5).  It appears to be another signal for a flatter curve.
Posted on July 23, 2015 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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