–Employment data today with NFP expected 200k.  March midcurve options expire.  US rate futures closed on their lows going into the data with the ten year yield up 4.5 bps yesterday to 259.6.  All eurodollar one-year calendar spreads made new highs, with EDM7/EDM8 +2 bps tp 59.5.  I wouldn’t have thought today’s data would be that important, given near 100% pricing of a March hike and the ADP number Wednesday.  However, the most telling change in sentiment is coming from euribor, which was crushed yesterday, with reds,-3.0, greens -6.375, blues -8.125.  Volume was heavy; contracts made new lows across the curve.
–As an example. ERM7/ERM8 since the beginning of March has surged from 6.5 to 17.5.  ERM7/M9 (2y spread) from 18 to 39, and ERM7/M0 39.5 to 64.5.  These moves represent a significant change in global interest rate sentiment.  Eurodollar calendar spreads are also testing the upper ends of ranges of the past three months.  As an example, red/gold pack spread yesterday finally posted a new monthly high of 83.75 (+4 on the day).  This is still well below last December’s high of 100, but near spreads are more aggressively testing highs from the end of last year.

–As I have mentioned previously, euro$ option trades have mostly been predicated on specific scenarios of Fed tightening, for example, many shops had called for June and Dec hikes.  The equation has been thus: “If the Fed hikes twice with the possibility of three, then contract x will be at this level.”  The compression of libor to OIS has changed the dynamic, but only to a small extent. As a consequence, many puts are seen as having almost certain terminal value of zero, because the Fed could NEVER tighten 4 times.  The market has almost lost the concept of ‘overshooting’ or the possibility of another catalyst which can blow up the best laid plans.  So, you might be “right” about the Fed possibilities, but when the market overshoots and puts blow up, it’s either exit or double up.  The latter works sometimes, but not always, just ask Jon Corzine.  Regardless of today’s number, I would assign about 10% probability of a hard sell off.