May 25. Front eurodollar contracts look vulnerable to downside

–Little net change in US rate futures after a weaker opening.  Continued erosion in implied vol and in one-year eurodollar calendar spreads, with EDZ1/Z2 spread in 2 bps to a new low of 85. (Selling of TYU 121.5^ from 3-00 to 2-62)
–There are a few good pieces of news.  Late credit card payments fell to the lowest level in 15 years, “..the rate of payments 90 days or more past due on bank-issued cards dropped to 0.74 percent in the first quarter, down from 1.11 percent a year ago.”  (HuffPost)  The same article says balance continue to drop, haven’t been this low since 2000. It’s sort of surprising at first glance that households would pay unsecured debt in a more timely fashion than collateralized (mortgage) debt, but that’s the state of view regarding the value of said collateral.  Also, Chrysler paid off gov’t loans early and an AIG stake was sold for $5.8 B for a small profit to the US gov’t.
–While USD libor settings continue to drip lower, near eurodollar contracts are under some selling pressure. There have been several buyers in good size recently of puts on EDU1 and Z1.  This is NOT the time to try to squeeze a few bps out of the front end of the curve looking for convergence to LIBOR settings.  If anything bad happens to US stocks, it will be reds and greens that perform, the front end is vulnerable to higher rates.  (And recent performance of China, India and Brazil stocks are evidence of what can happen when liquidity perceptions change).
–News from Japan is bad, with yoy exports -12.5%.  Although there were some who thought rebuilding after the tsunami would boost Japan’s economy, it looks the opposite, and the tipping point regarding gov’t finances, demographics and pension payout obligations may be here.
–News today includes Durables expected -3.0% and US 5yr note auction.

Posted on May 25, 2011 at 4:52 am by alexmanzara · Permalink
In: Eurodollar Options

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