Nov 18. Eurodollar curve reflects stress in financial markets

The eurodollar curve continues to express its own form of operation twist, with near contracts getting hammered and backs floating higher.  Red pack fell 4.75 bps while golds were up 8.125; the pack spread closed at 154, a new low and about 1/2 the highest level of the year when it had gotten above 300 (in March).  Leading Indicators are released today (expected +0.5), and I know that one of the internal indicators is the curve.  It’s a bit hard for the curve to go negative at zero rates, but I am going to go out on a limb and say that a drop of 32 bps in a few days isn’t presaging robust econ activity, just the opposite. It’s change at the margin that’s important. EDH2 has risen 25 bps in yield this month as has EDM2.  Outside of money markets it probably doesn’t seem like much, but the option pit is reflecting concern.  A couple of weeks ago the EDM2 9750p were 1 bid/2 ask.  Yesterday they were 4.5 bid!  Pretty juiced up for a 2.5% strike where the Fed is vowing zero funds.
–Ten yr yield fell below 2% (1.96) and 30 yr bond below 3% (down 8 bps to 2.97).  It’s a grudging flight to safety at these low yields in a world where every central bank and gov’t wants to stimulate and fire up printing presses. Makes it especially hard to buy at these levels…but US bonds sure aren’t going down.
–Yesterday equities (finally) responded to stresses apparent in money markets.  However, given low treasury yields and squabbling gov’t authorities (that could be accused of recklessness), perhaps big cap US stocks are taking their spot as the flight to safety haven.  If you want to be short equities, avoid the big cap indexes.
–I still think there’s a big negative shoe to drop related to the Man bankruptcy.  I know several people who cleared Man, still no idea of margins, let alone cash.  It seems to me that the CME probably isn’t margining accounts correctly, though perhaps the aggregate is sufficient.  Here’s a quote from a market maker who trades across several products:  “The way they’ve (CME and new clearing firms) treated the options accounts tells you all you need to know… 2 weeks into new clearer…nothing on statement is understandable but inventory.”  In other words, cash isn’t right, margin requirements are not right and haven’t been since the bankruptcy, but positions have transferred.

Posted on November 21, 2011 at 12:42 pm by alexmanzara · Permalink
In: Eurodollar Options

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