March 7. Implied vol low, but percolating under the surface

–Yields were little changed on the whole yesterday, though the curve steepened.  2/10 treasury spread up 1.8 bps to 118.8, with tens alone +1.3 to 249.3.  Notable is the compression in ois/libor spread from about 31 bps recently to 24-25 (spilling over into declines in swap spreads as well).  So, while the two year treasury yield eased 0.5 yesterday the 2-yr bundle in dollars was +1.6875.  In spite of this, there is continued heavy buying of EDM7 9862/9850p 1×2 (75k) which settled 2.25.  As mentioned yesterday, with 903k in open interest as of this morning in 9862p, the longs will have an incentive to monetize on any move lower, which might tend to hold the market around strike even with a March hike, especially given the decline in ois/libor.  EDM7 9862/9850p 1×2 settled 2.25, the 9875/9862/9850p fly settled 2.75 (latter may now be preferable).
–Chart below shows 30 year vol, which as can be seen, is at the very low end of the range for the past nine years except for 2014.  The chart shows May vol, which, due to the French election, trades at a substantial discount to June, which I marked yesterday at 9.9  (vs 9.1 on the chart).  In either case, bond vol looks cheap, and the futures chart portends lower prices.  30-yr bonds are auctioned Thursday, preceded by 3’s and tens today and Wednesday.
–Quite interesting article on FT Alphaville yesterday, https://ftalphaville.ft.com/2017/03/06/2185614/guest-post-cds-markets-signal-rising-fear-of-euro-breakup/
This note informs that prior to 2014, “Buying CDS wouldn’t have helped [against currency redenomination of sovereign debt] becasue the standard contract explicitly excluded debt redenomination from the list of credit events if the issuer were a member of the G7…” Two years later, new ISDA standards entered into force: contracts made since 2014 protect against euro area countries redenominating their debt into nat’l currencies.”  The article goes on to note that ‘the difference between CDS-2014 and CDS-2003 has doubled from 20 to 40 bps” in Italy and in France has gone from 3 to 24 bps.
–As noted above in the US vol spread between May and June due to French election uncertainty, the CDS market also reflects fears of a eurozone break-up.
–Huge adjustments yesterday in red and green midcurve put spreads: Long put spreads in short and green April and May put spreads were sold on exit, in turn adding to existing long 25-wide put spreads in short and green Sept and Dec.  Details on a later note.
–New high bitcoin.  China ccy also edging weaker.

 

Widening of old vs new (after 2014) Italy CDS, from FT Alphaville story
https://image.webservices.ft.com/v1/images/raw/https%3A%2F%2Fftalphaville-cdn.ft.com%2Fwp-content%2Fuploads%2F2017%2F03%2F06182343%2FItaly-CDS-basis1-590x385.png?source=Alphaville

 

Posted on March 7, 2017 at 5:39 am by alexmanzara · Permalink
In: Eurodollar Options

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