May 21. JGB yield rise along with hints of QE reduction could cause bond sell off

–US interest rate futures closed slightly lower yesterday with ten yr note tacking on just over 1 bp to yield 196.3.  There were some large trades in September ten year options, new put spread buyers and a new seller of 20k 129/133 strangles 58 to 57.   The 129 strike is about 22-23 bps away, which would equate to around 2.19 in current ten year yield (with another 10 bps of premium cushion).
–The big action yesterday was the early precious metals plunge, followed by a powerful rally.  Silver made new lows for the move, taking out the mid-April low on Sunday evening, but closed slightly higher on a range of $3.  However, open interest was only up by 2900 contracts.  Gold held last month’s lows and closed higher on the day, huge volume of 276k with open interest +7900.
–Not much in the way of economic news today, though both Bullard and Dudley speak, at 11:30 and 1:00 NY time respectively.  The big event is Bernanke’s testimony tomorrow in front of the JEC. Bonds are trading heavy; additional hints about QE reduction should force the hand of weak longs.
–Yen is lower today after yesterday’s bounce, USD/JPY 102.70.  JGB yield continues to press higher, now up 5 bps to 89.  It appears as if there are growing doubts that Japan can keep a firm hand on the financial forces it has unleashed, like Icarus flying too close to the sun.  If JGB yields continue to surge, there will be global bond market reverberations.

Posted on May 21, 2013 at 5:35 am by alexmanzara · Permalink
In: Eurodollar Options

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