May 24. No cushion / no policy room for the Fed….

–China downgraded by Moody’s in part due to the explosion of debt, yet US stocks are slightly positive this morning.   The sell off relating to Trump’s misadventures has been erased.

–US rates rose yesterday with tens up 3 bps to 228.3.  Auction pressure and buoyant stocks were factors; 5 year auction this afternoon.  Fed releases minutes from the May FOMC meeting today, with possible clues regarding balance sheet reduction.  Several officials have emphasized that the Fed will go slow in order to prevent any market disruption.  In terms of odds for a June hike, FFN7 was trading 98.98 yesterday and settled 98.5, indicating 85%.  The peak one-yr euro$ calendar is still EDZ7/EDZ8, which closed 36.5, up 1.5 on the day.

–Some early lifts in July TY calls yesterday mostly related to replacing expiring June exposure, however, the trend of overall pressure on premium continues.  July atm (125.5) straddle settled at just 1’14 or 4.2.

–If missed yesterday, Moody’s warned on cov-lite loans in the US. Its “newly released report finds poorly structured covenant-lite loans making up a much larger proportion  of the US leveraged loan market than before the credit crisis, portending lower investor recoveries during the next downturn.”  The report notes that cov-lite loans made up 3/4’s of the new institutional loan issuance in 2016.

–Overall, credit spreads remain extremely tight, implied vol is low everywhere, stocks are at lofty levels and the Fed has warned on CRE.  The Fed has been attempting to create some ‘policy room’ for the next potential downturn, but there is simply no cushion in current market pricing…which, of course, keeps the pressure on the Fed as the only game in town. (…so buy stocks)

Posted on May 24, 2017 at 5:27 am by alexmanzara · Permalink
In: Eurodollar Options

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