March 24. Fraying at the edges

–Treasury option expiration today with TYM threatening the 129.5 strike going into the long holiday weekend.  Only 55k open coming into the day (in TYJ 129.5 call).  Implied vol firmed yesterday as call buying was a theme, though overall volume remains light.  Economic news today includes Durables, expected -3.0% bot only -0.2 ex-Transportation.  Jobless Claims expected 268k.
–The ten year yield fell 6 bps to 187.2.  Curve was slightly flatter with red/gold euro$ pack spread falling 2.5 bps to 73.625, less than 1 bp off the lowest level of the year.
–The safe haven of treasuries is gaining more appeal, as fraying around the edges appears in all corners of the globe.  In the US, focus in the markets is on a supposed mutiny against Janet Yellen’s dovish stance at the FOMC press conference, as several officials opine that the Fed should get on with the job of rate hikes.  There is now speculation that a hike could come as soon as April, though April/May FF spread settled at just 2.5 (was 2.5/3.0 during the day).  Certainty of a hike in April would put that spread at 20 bps.  The terrorist attacks in Brussels have increased odds of Brexit…does the Fed want to raise US rates at the June 15 FOMC just prior to the UK referendum?  The world appears much less certain.  If there were to be a Brexit, tariffs on UK goods would slow trade.  But the idea of tariffs is also an issue in the US going into the election.  Increased security is another factor that slows down global trade at the margin.  In other disquieting news, some EU multinational corporate bonds now trade zero or slightly negative, Canada is likely to legislate bank bail-ins, where debt is converted to equity (might as well just buy the equity portion of the capital structure then, right?).  And Japan is looking at giving low income people gift cards that can only be used for spending.  I don’t know why that last bit should sound odd, the US already does it, but in the US it’s not a program specifically to juice the economy.  (Though a day ago there was a story of a man in the US trying to buy a BMW with food stamp cards).

Posted on March 24, 2016 at 5:25 am by alexmanzara · Permalink
In: Eurodollar Options

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