March 18. FOMC loses patience

–HARD flattener Tuesday in front of the FOMC announcement today.  Red/gold eurodollar pack spread dropped a whopping 8.625 bps with Reds -1.625 and Golds +7.  The lowest I have marked red/gold this year (on a rolling basis) is 105.25, in early January.  This is the second lowest of the year at just 1 bp higher, 106.25.  5/30 treasury spread also at a new recent low 105.8, down 5 on the day.  Low of this calendar year has been 103.  2/10 was down 5.5 to just above 139.
–Heavy selling in front eurodollars, notably at least 100k EDU5, with prelim open interest showing an addition of 61k contracts.  I guess SOMEONE thinks “patient” is disappearing.  But whether modest tightening comes in June or not, a somewhat less accommodative Fed in a world of crashing oil prices and slowing growth can certainly set the stage for new curve lows.  My inclination is to lean against flattening in the back end of the curve, as China is likely to respond to its weakness with highly stimulative measures, and yoy comparisons with today’s oil and other commodity prices are likely to bottom out and start rising some months from now.  Additionally, the market holds the opinion that Fed moves can only come in 1/4% increments.  However, the September 2014 SEP was the first time that the “dots” showed 1/8% increments.  Could the first Fed hike be a move from 0-25bps to 12.5-37.5bps, with interest on excess reserves moving up just 1/8%?
–There have been several high profile warnings recently about increased volatility and stock market crashes(?), no, we’ll just call them ‘corrections’, notably Ray Dalio.  (From the FT, ‘Dalio warns Fed of 1937 style rate risk…says rate rise could have unintended consequences’).  So, crash in 1929, repeat in 1937 and war in 1939.  Let’s see, crash in 2007-08, repeat in 2015, war in 2017?  I guess we’ll let President O’Malley deal with that…

Posted on March 18, 2015 at 5:10 am by alexmanzara · Permalink
In: Eurodollar Options

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