May 12. New lows in the curve

–In spite of new highs in oil, and the fact that Italy and Spain have issued 50 year bonds, the US yield curve is flattening.  The ten year yield fell 2.3 bps to 173.5.  2/10 treasury spread notched a new low just above 101.  Red/gold euro$ pack spread closed at 68.5, its lowest level since 2008.  Many 3 month euro$ calendar spreads only trade 5 bps, for example EDZ6/H7, EDH7/M7 and EDM7/U7.  AMZN is making new highs but the rest of retailing world is struggling.  A client yesterday coined it the “uberzon effect”.   Hyper-efficient distribution forces down prices (and likely caps wage growth as well).   I suppose a related point is one that Kyle Bass made about China…  The existing debt is outstanding to the ‘old economy’ which is being pressured from all sides.  That debt has become riskier, so flows seek safer havens and accept lower yields.  For example, every morning it appears that the US equity market is the beneficiary of flows from Asia.
–There was a late buyer yesterday of 20k EDU6 9912 put for 2.25.  There was also a large (new) buyer during the day of the Aug/Oct FF spread for 4.5 (settled there).  Both of these trades work as the market hones in on the Sept 21 FOMC as the next Fed hike.  The longer term problem would appear to be that as odds go up for a hike, the curve will be forced flatter, creating challenges for banks.  Buts that’s down the road….

Posted on May 12, 2016 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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