May 10. All about yen

–$/yen burst through 100 yesterday and quickly surged to a new high at 100.60, and is now 101.20 as G7 meets. Japanese ten year jumped 11 bps to 70, a huge percentage yield increase. As Japanese investors move abroad for bond investments, funding the gov’t will become a problem for Japan.  US rates also moved higher yesterday amid broad based dollar strength, with curve steepening to new recent highs, though just barely.  This morning TYM is testing support at 38% retrace level of March low to the high in the beginning of May, 132-12.
–Interesting to note that the proxy for yield in the stock market, the Dow Utilities Index, also put in a top right in the beginning of this month, and has fallen nearly 5% since then (in only 7 trading days).  As mentioned previously, the Utilities responded even more strongly than the SPX on the run-up from mid-November associated with yen weakness, with DJUI +23% and SPX +18%.  Now we are seeing a divergence; with a new low in yen, Utilities are falling while SPX squeaks out new highs.
–While there were violent moves in FX, implied vol in rates was once again lower.  The longest dated euro$ straddle EDH16 with 34 months left until expiry, was trading 89 a few weeks ago, now down to 82.5 (the 9900 strike).
–There was a rumor yesterday that Hilsenrath of WSJ was writing a piece about QE tapering sooner rather than later.  That same paper notes the decline in the deficit in today’s issue.  With reduced borrowing needs, QE will take a larger percentage of treasury issuance…perhaps a reduction in QE is getting closer…
–Today Bernanke speaks at 9:30.
–Another 180k of the red midcurve/green midcurve put spread was added yesterday.  I have heard various stories about this position being a hedge against another position.  Not sure about that, but it does remind me of an old euro$ pit story.  Wayne Friedman (FO) had bought a bunch of low delta calls from a local (was it Pat Sullivan?) and wanted to bust the trade a couple of minutes afterward, perhaps due to a desk error.  The market maker said he couldn’t, he had already bought something against them (as a hedge).  Wayne says “What?” Market maker, “A new jaguar”

Posted on May 10, 2013 at 5:48 am by alexmanzara · Permalink
In: Eurodollar Options

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