June 11. Negative convexity pressure in the face of falling inflation

–US interest rates continue to rise with tens up 5.5 bps to 221.5 as of Friday pit session close, now 2.25.  Bullard made comments yesterday that low inflation could prolong QE, and indeed ten yr treasury to tip spread made a new low just under 215.  However, all eurodollar calendar spreads made new highs, with red/gold pack spread (up 5.75 to just under 205) surpassing the peak made in March 2012 when ten yr treasury yield rose above 240.  Also worth noting is that near Fed Fund contracts are edging to new highs, with FFM now 99.91 or 9 bps.
–Some large moves overnight as BOJ left policy unchanged.  USD/JPY much lower, currently 9702 or down 1.76%, having been as low as 9646. New lows for the move in Aussie and in Mexican Peso.  ESM (mini SP) is in the process of erasing Friday’s rally.
–Treasury auctions kick off with three year today.  NFIB small business optimism also on tap, expected 92.3 which remains in dismal territory.
–Midcurve options expire Friday, with all June contracts now having dropped below important strikes: EDM14 just under 9950, EDM15 under 9900, EDM16 just below 9825 and EDM17 just under 9750.  Those who are short puts have to decide whether to cover or sell futures in the hole.  For example, EDM16 has already fallen over 75 bps since the high set in the beginning of May…same problem faced by MBS portfolios.

Posted on June 11, 2013 at 5:37 am by alexmanzara · Permalink
In: Eurodollar Options

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