Nov 19. Back eurodollar spread collapse

–Wednesday featured little change in interest rate futures, but a spirited rally in stocks with SPZ up over 30 points.  Tens ended up 1.4 bps to 2.268.  The curve flattened with the red/gold eurodollar pack spread down 1.375 to 111.5.
–The October FOMC minutes released yesterday revealed that the language change referencing the “next meeting” was to give the market notice that conditions could be met for lift-off in December.  Reaction was fairly muted.  However, it’s instructive to look at markets since the actual meeting took place on October 28, followed by the strong employment report on Nov 6.  Back month eurodollar spreads have been crushed and the dollar index has strengthened, re-testing highs set in March. I have attached a chart of EDZ’19/EDZ’20 one year calendar spread (blue/gold Dec).  Prior to the FOMC this spread was 32.5 to 34.  Yesterday it closed at just 23.  To my way of thinking, it simply looks as if the global market wants to own longer dated dollar assets, be they stocks or bonds, and squeeze term and inflation premia out of the market. Implied vol is also deflating.  When looking at individual contracts like EDZ6, it closed yesterday at 9891.0, down only 0.5 on the day despite huge put buying.*  In fact, the day before the employment report, it closed at 9892.5.  On the day of the report it traded as low as 9877.5, but since then is almost right back where it was.  The USZ bond contract this morning is slightly above its pre-employment level. The market and the Fed may be on the same page in terms of the odds for a Fed liftoff in December, but it appears the market is guiding to an even shallower pace than the Fed’s “gradual” path.  It might be a return to the conundrum of the 2004 tightening cycle where the yield on back contracts barely responds to hikes.
–News today includes Jobless Claims expected 270k.  Philly Fed at 0.0 vs last at -4.5.  Leading Indicators +0.5.
–Square IPO priced at $9 and begins trading today.  IPO price set 42% lower than the last private round funding.  It’s a mobile payment company that is now allowing you to pay into its loss making operation.

*New buyer of 60k 0EZ 9887/9875/9862 put flies for 2.5 and a buyer of 25k 0EZ 9875p for 1.5.

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Posted on November 19, 2015 at 4:57 am by alexmanzara · Permalink
In: Eurodollar Options

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