March 21. Rates slipping lower as Fed taken out of the equation

–Yields drifted lower yesterday in the context of a flattening curve.  The ten year fell nearly 3 bps to 247.0.  The only one-yr eurodollar calendar spread clinging in the thin air above 1/2% is EDM7/EDM8 which settled 51, down 1.5 on the day.  Once again, there was substantial adjustment of option positions, reflecting libor targets that are now 12.5 bps different from where they had been a month ago.  For example, EDZ16 closed near 9900, which would have implied a price in EDH17 at 9875 on a 25 bp hike.  Instead, with the collapse in lib/ois EDH7 expired near 9887.  Which now leaves June’17 targets at either 9862.5 or 9887.5.  Therefore, there was a large exit sale of 80k of EDM7 9887/9875/9862p fly, which settled 3.75.  There is also continued buying of EDM7 9862/9850ps vs EDK7 9862p for 1.25.  Perhaps lib/ois widens again on another hike?

–Bloomberg noted a gaping divergence between the CBOE’s SKEW index and VIX, as the skew index surges, indicating wing protection for le Pen? N Korea? additional signs of problems with the european banking system?  In any case, the purchase of premium is NOT occurring in the interest rate arena.  Late in the day there was a seller of 9k 3EJ 9750 straddle at 17.5; vol in general is shifting down.  Nasdaq is near new highs this morning, and the Euro is also firming as the Fed is taken out of the equation for now.

–In the weekend notes, I mentioned deterioration in auto loan statistics and recovery rates, citing Mizuho’s Steve Ricchiuto.  This theme is corroborated by a ZH article which notes that used car prices are crashing ‘the most since 2008’.


–April treasury options expire Friday.  A couple of Fed speakers today, though some occur after the close.  Esther George of KC at noon EST.

Posted on March 21, 2017 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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