March 9. When’s a hike not a hike?

–The big mover yesterday was oil, which plunged nearly $3/bbl yesterday to settle $50.28 (CLJ7).  The range this year has been roughly 52.50 to 56.00.  Between yesterday and this morning the price change has well exceeded that range, from over 53 on Tuesday to 49.33 last.  I am not sure what the knock-on effects will be, but it’s worth keeping in mind in the context of low implied vol environments in treasuries and US stocks, that big moves sometimes happen in a hurry.

–At the other extreme is the front end of the US market.  There has been endless hand-wringing about whether the Fed would hike in March, and, in the aftermath of the Fed’s guidance last week, Fed funds contracts indicate near certainty (93%).  So I looked back just prior to the last Fed hike in December.  EDZ16 was around 9901.  Now EDH17 is 9887.  Gasp! A change of 14 bps.  When’s a hike not a hike?  The date I chose was 7-December, about a week prior to the hike.  At that time, the red/green pack spread was just over 39, yesterday it closed (at a new recent high) of 40.625.  Red/gold was just over 90 three months ago, now just under 80.  The ten year was 235, now 255.  Pretty modest changes overall.

–What is perhaps a bit more interesting is some of the front spreads.  Currently the first 3 month spread is EDH17/EDM17, march/june.  It settled at a new high of 19.  In December of last year Dec/March was only 5.25 and the Z/H/M fly was -7.75.  Currently H/M/U is +5.5.  Just looking at these spreads one might conclude that EDM7 looks a bit cheap.

–A huge ADP print yesterday likely removes any drama from the payroll number tomorrow.  Solid demand at the ten year auction limited damage in terms of a big yield jump.  Tens up 4.2 bps to 255.1.  In euro$’s, all front end 1-yr calendar spreads made new highs, with EDM7/EDM8 settling at 57.5.  The back end of the curve though, remains rather flat.  So while the red/green pack sprd settled at a new recent high of  40.625, green/blue closed at just 23.375 (red/grn/blue fly at new recent high of 17.25).  30 year auction today.

Posted on March 9, 2017 at 5:27 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply