May 29. US yields jump on heavy volume

–Huge jump in US rates yesterday with tens up 12.5 bps to 213, and up to 217 shortly after close of open outcry.  Now at 219 as JGB’s also rose in yield to 93.  Bruce Krasting had a piece [Bond Vortex…] which suggested a lot of negative convexity hedging would come into play around 220 yield; it’s now there. http://brucekrasting.com/bond-vortex-in-the-works/
–The point is that market movements in this environment won’t be driven by economic data, but rather by position adjustments, some of which are forced. The last time yields were this high, including 5’s being above 1%, was in April 2012. It was in March of 2012 that tens hit 240, and there is a previous high there as well from October 2011.  According to my calculations TYM would be around the 128 strike (or just slightly above) at 240.  Five year auction today, followed by 7’s tomorrow.
–All euro$ calendar spreads made new highs.  Volume was heavy. There had been substantial buying in several spreads in the past few weeks, for example EDM15/EDM16 around 47-48, now trades 68.  From the highs at the beginning of the month, EDM6 has dropped 60 bps (from 9903.5 to 9843). Red/gold pack spread is now around 200, which had been the high in March 2012 (202/203).  Straddles exploded higher.  On a more mechanical note, it’s worth noting that some of the interest rate market making groups have pulled back, and there are generally fewer people on the floor.  The “request for quote” function on the screen didn’t seem to be updating quickly either. Trading bottlenecks are likely to occur…

Posted on May 29, 2013 at 5:33 am by alexmanzara · Permalink
In: Eurodollar Options

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