May 21. With the propect of Fed hikes diminishing, plays for rolling up the curve re-emerge
–US yields fell again yesterday with tens at 251, down 2.5 on the day. Green euro$ pack was the strongest performer, +5.5. Red/green pack spread nearing 100 as suggested a couple of days ago (100.75s, -2.5 on the day). Red/blue also edged to a new low of 185.
–There has been discussion of what the catalyst is for this move to lower rates, and while I don’t really follow categories like Large Specs and Hedgers, what I do continue to see is buying. Yesterday there was reportedly a buyer of 75k EDZ15 9913 to 14, open interest increased 23.5k. We continue to see drops in open interest of nearer contracts, for example EDH’15, and gains in reds (EDZ5 and EDH6). Could just be a roll out the curve. EDZ4/H5 spread is 7 and EDU5/Z5 is 21.5, so the roll is worth 3 times as much being long EDZ5. If Fed hiking is taken off the table then ED contracts will float higher, simple as that. And bearish tightening positions in greens will be exited, while one-year butterflies will plummet. (Fro example EDh5/H6/H7 fly dropped 6 yesterday to -27.5; it had traded -4 when the market was beared up. It’s worth noting that bearish comments from Fed officials (Bullard last week and Plosser yesterday) are ignored and mildly dovish comments (Dudley) are embraced by the market. It’s also worth a mention that on the euribor curve, the first contract that is above 1% is ERZ17, 3 1/2 years from now, and that JGB’s remain under 60 bps.
–Yen appears to be breaking out, with $/yen now just below 101. Again, the yen is a risk-off canary, though for now US equities appear resilient.
–FOMC minutes today
