July 30. St Louis Fed Bullard suggests more QE

July 30.  Calendar spreads in eurodollars flattened with new lows in red/green pack spread to just above 82 bps, -3.5 on the day.  Action in treasury futures also geared toward flatteners, for example, there was a large buyer of ultra bond versus 5 yr note.  There was also a large trade in ten year options, appears to be an exit.  UBS sold about 35k TYU 123/125c spd 47 to 48.
–One reason for price action was St Louis Fed’s Bullard paper where he suggests raising FF to a still low but stable rate and engaging in a round of QE (buying treasuries) which will convince the market of a rise in inflation.  This is a fascinating piece about avoiding the Japanese outcome, an unintended state of low rates and deflation.  As a practical matter it suggests the possibility of another dissenting vote at the upcoming FOMC.  In the paper Bullard briefly refers to the ten year note vs tip spread from an earlier time; I would just note that presently this spread hasn’t plunged and is around 181 bps, so from that standpoint market expectations of future inflation aren’t terribly low. While some flatteners went thru as response, I would think some selling of back FF also in order. 
–There was another interesting piece on ZH suggesting the Fed’l govt could just refinance everyone’s mortgages, which would really just bring out into the open the fact that the US mortgage market is nationalized.

Posted on July 31, 2010 at 9:07 am by alexmanzara · Permalink
In: Eurodollar Options

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