March 18. Fed’s move squelches volatility

–Interest rate futures continued to rally after the Fed’s shift back to the dovish camp.  The ten year yield fell 3.3 bps to 190.3.  The eurodollar curve flattened, with reds +2.25 and golds +5.125; red/gold pack spread is hovering around the lows at only 76.5 bps.  One year calendar spreads also declined, with the first TEN (!) one-year spreads setting between 25 and 30.5.  The implication is one hike per year.  In fact, the June/July Fed fund spread, which would be expected to trade at least 12 bps if the Fed hiked in June (as the date of the June meeting is June 15, halfway through the month), closed at only 4.5 bps.  Reflective of the move to an inert curve and Fed, implied vol in interest rates is seeping out like blood from another Chicago gunshot victim (21 shot and one stabbed yesterday).  Sub 5% in TYM.  Green and blue midcurve straddles lost 1-1.5 bps.
–However, we can all take solace from the rallies in risk assets and oil and commodities.  Some of the financial stresses facing emerging market economies and junk bonds are being eased.  EEM (emerging mkt etf) and HYG, JNK all have had strong rallies and are at levels not seen since early December.  On the other hand, EUR and JPY also strengthened against the dollar.  So as Brexit looms, Draghi is left with a stronger currency that will further sap the strength of the EU exporters.
–The fact remains that official inflation in the US has gently turned up.  The boost in commodities will likely reinforce inflationary impulses.  The back end of the curve has been conditioned to float to lower rates, but the curve will likely steepen going forward.

Posted on March 18, 2016 at 5:29 am by alexmanzara · Permalink
In: Eurodollar Options

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