March 9. Flatter

–Rates eased yesterday with the ten year yield declining 7 bps to 1.832%.  While next week’s FOMC meeting appears to be a dead issue, the idea of a hike in April or June remains a possibility.  Over the past two days there have been sizable trades placed for the idea of hikes going forward.  Yesterday it was EDU6 9912/9887/9862 put fly bought for 5.5 (settled there) in size of 40k.  There was a similar size buyer of the April/May 9912.5 put calendar for just under 1 bp, targeting an April hike, (April should expire worthless, leaving a cheap residual bet for the late April FOMC).
–The 2/10 treasury spread made a new low during the day, but closed positive at 96.  However, the red/gold euro$ pack spread closed at a new low just under 74.5 bps.  The entire futures complex closed with lower yields on the day except for EDM6, which was unchanged at 9923.5.  By maintaining a hawkish stance, the Fed is encouraging a flatter curve.  If they simply dismissed the idea of any near term hikes, the curve would steepen, and the dollar would likely ease.  A softer dollar would underpin a nascent recovery in commodities and help on the inflation side, while higher long rates might help quell some of the speculation in, for example, CRE (noted by the Fed as a risk factor).
–ECB meeting is tomorrow.  Risks loom large, as noted by this clip on Italy’s financial sector from Business Insider.  “At the core of the issue is the concerning level of Non-Performing Loans (NPL’s) on banks’ books, with estimates ranging from 17% to 21% of total lending.  This amounts to approximately €200 billion of NPL’s, or 12% of Italy’s GDP.  Moreover, in some cases, bad loans make up an alarming 30% of individual banks’ balance sheets.”  The article further notes that Italy’s plan to set up a “bad bank” is now prohibited by EU rules.
–Ten year note auction today.

Posted on March 9, 2016 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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