June 28. It’s about the financial system

–A few quick observations about yesterday’s trade.  All eurodollar contracts settled at a new high for the year, exceeding February’s settlements.  Near calendar spreads made new lows, for example Sept16/Sept17 closed at 13.5 and Dec16/17 at just 15.  The pressure is on very front-end calendars, as thoughts of any tightening over the next year evaporated.  Red/gold euro$ spread did NOT make a new low, though it fell  3.625 bps to 63.75 (58 has been the recent low).  However, 2/10 treasury spread DID make a new low, plunging over 7 bps to just under 86.
–Financial stocks are approaching extreme stress.  For example, DB and CS (as examples) are well below the lows experienced in 2012, when Draghi had to utter his famous “whatever it takes” phrase to support the existence of the Euro.  While the stocks are below 2012 crisis lows, I looked at 5yr CDS and they aren’t quite through the highs from just this February, which seems a bit of a disconnect to me.  However, a story in the Telegraph notes that Italy may circumvent EU rules against sovereign bank bailouts with a €40bn package for its banks.  In the US, financial stocks have fared better, though still vulnerable.  For example GS closed below 140, the lowest since 2013.  A comment on the Across the Curve website was pretty insightful (and/or inciteful?).  “I remind you of what really forced Bear, Lehman and Countrywide out of business…short term funding issues: the inability to fund themselves.”
–Implied vol in treasuries is unsurprisingly at recent highs.  For example, the US 30-yr bond contract saw relatively heavy option trade, and the atm Sept straddle closed at 7’00, or 12.5 vol.  I would note that Friday’s range alone was 8 points.  In eurodollars, there was a roll from long EDZ6 100 calls into EDZ7 100 calls; the latter settled at 3.0.
–This morning the pound and equities are seeing a bounce, but treasuries maintain a firm bid.  USDCNY at 6.65 as China’s currency continues to weaken, with associated deflationary implications.

Posted on June 28, 2016 at 5:07 am by alexmanzara · Permalink
In: Eurodollar Options

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