Nov 17. Fitch warns on US banks due to contagion risks

Late day equity sell off was sparked by a Fitch report that US banks were at risk from european contagion.  The front end of the dollar market has been hinting at that for a month, with EDH2 beginning November at 9942.5 and tumbling to 9922.5 by yesterday (-5 bps on the day at 77.5 yield). Underlying 3M LIBOR was 47bps yesterday, so EDH2 was at a 30 bp spread. Implied vol in the front end surged, with EDH2 9925 straddle settling 37 from 34 trade early in the day. Swap spreads widened in another sign of stress, while the eurodollar curve flattened to new lows.  Red/green pack spread fell to only 33 bps, while red/gold sank nearly 11 bps to 167. Ten year yield ended at 2.02, down 4 bps.
–Treasury vol was somewhat surprisingly under pressure throughout the day.  TYZ 130.5^ settled 1’08.  Even though there is only a week to go for Dec options, buy out of the money calls.  This thing could unravel by Thanksgiving, as every new european action has less beneficial effect.
–After a string of better than expected US data, the question is whether the brewing financial crisis will spill over into real economic activity.   My guess is that it will, and it appears that interest rate spreads support that view, while stocks are beginning to at least consider a more negative outlook.

Posted on November 21, 2011 at 12:41 pm by alexmanzara · Permalink
In: Eurodollar Options

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