May 31. Safe haven rates plunge as europe unravels

–“Further monetary policy accommodation is both appropriate and necessary.” Fed’s Rosengren. However Dudley yesterday appeared satisfied with current policy. I don’t know how monetary policy can get much more accommodative given plunging yields driven by safe haven flows. Do we really want to exacerbate that dynamic?
–The world is racing toward zero rates with German Schatz (2 yr) reaching that level yesterday. Swiss already have negative rates and issued debt at negative yields. In the US there was a buyer of 13k TUU 110.5c for 2.5, which also suggests a single digit yield (at least it’s positive) compared to current 27 bps. (The strike price is around 13-14 bps). Red/green eurodollar pack spread closed at a new low just under 22 bps. US ten year fell 11 bps to record low 1.62%.
–Global growth is stalling. Brazil cut rates to 8.5%. India’s GDP was only 5.3%, a nine year low according to Bloomberg. The stock markets of both countries are down ~25% from highs three months ago.
–US stocks were down a bit over 1%, still holding up admirably well and likely benefiting from safe haven flows. Since the Fed chairman has specifically pointed to policy success as measured by rising stocks, a further drop would have to be considered unnerving.
–With June eurodollar midcurve options expiring two weeks from Friday, both the 9937.5 straddle on EDM13 (ref 9935.5) and 9925 straddle on EDM14 (ref 9924) settled at only 7 bps. Too complacent? There was a new buyer of 40k 2EM 9912p for 1 yesterday covered 9922.5/23.
–Today’s news includes ADP expected 154k. Job Claims 370k. GDP 1.9% and Chicago PMI expected 56.1 from 56.2.

Posted on May 31, 2012 at 5:23 am by alexmanzara · Permalink
In: Eurodollar Options

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