Nov 22. Thankful for a flatter curve?

–Another day, another new high in the 2 yr note yield.  Yesterday 2’s rose 2.1 bps to 177.1, while the ten year yield fell 1 bp to 236.  Obviously, this led to new lows in the curve, with 2/10 below 60 bps and red/gold pack spread below 34.  As I mentioned a couple of days ago, even though flat or inverted curves are good indicators of recession, in the 2004/2006 tightening campaign, many curve measures inverted right at the beginning of 2006, yet the Fed continued to hike until June as stocks continued to climb.  There was an interesting note on ZH yesterday that cited changes in the tax code as a reason underfunded pension funds are buying bonds before the end of the year (leading to further pressure on the curve).  (Short note, link below).

If you are a corp with an underfunded pension fund, you get a tax incentive to fund the pension THIS YEAR vs in the future when the corp tax rate drops to 20% [from 35%]. Why? Because contributions to the pension plan are tax deductible.

–Currencies in Turkey, Zimbabwe, Venezuela are falling or have already crashed and many more countries are on the brink.  No wonder that bitcoin is $8300.

–In euro$’s, a few profit taking sales.  One interesting example: Seller of 60k EDU8 9800/9762ps at 10.0.  A while ago, he had exited long 0EZ put spreads to roll into both June and Sept put spreads. EDU was 9775/9800, but then he rolled the 9775p into 9762p for an extra 0.75, and now launched the 9800/9762ps.  With EDZ7 at 9845 (on a nearly 100% odds of a Dec hike), additional hikes in March, June and Sept would put EDU at 9760 to 9770.  Currently, FFG/FFJ is 13.5 (so slightly better than 50/50 for March move) and FFK/FFN is 10.5, so not quite 50/50 for June.  Note that every deferred ED one-year calendar from EDU18/EDU19 on back is below 25 bps, most are at new lows under 1/8%.

–In treasuries, huge replacement of teeny puts.  Cab 7 paid for 140k TYH 108.5p and FVH 114 and 113.5 puts (total 140k between them).

–Have a Happy Thanksgiving holiday  (“Thanksgiving’s very big in Sicily”), Alex



Posted on November 22, 2017 at 5:26 am by alexmanzara · Permalink
In: Eurodollar Options

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