Nov 25. While implied vols ease in interest rates, more warnings about high yield are issued

–Oil retreated from early strength and was down 90 cents late to 75.61 (CLF5).  OPEC meeting at the end of the week with the question of agreement on production cuts still up in the air.
–Interest rate futures started lower, but firmed during the day, notably after the strong two year auction.  Ten year yield fell 1 bp to 230.5.  Trades continue to favor curve roll-up strategies and softer implieds.  Seller yesterday (adding) of 30k EDH6 9825p covered 9895 and EDM6 9775p covered 9870 as a strip at 18.5.  Green Dec 9825 straddle settled 15.5 from 17.0 on Friday.  There is continued accumulation of TYH 129c, open interest up 10k, settled 20/64 ref 126-03.  However, I marked both TY and US implieds at new recent lows.
–There seem to be more articles recently warning about high yield/ corporate debt.  Perhaps the issue is heightened by the Fed’s recently issued ‘Supplemental Leverage Loan Commentary’  http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141107a2.pdf
This short report warns about credit risks, noting that “…31% of leveraged transactions originated within the past year exhibited structures that were cited as weak, mainly because of a combination of high leverage and absence of financial covenants.”  “….examiners noted an overreliance on borrower /sponsor base case projections when evaluating borrower performance.”  While it’s positive that the Fed is addressing these issues, there has been deterioration since the 2013 report.  I saw an investment bank snippet noting that Investment Grade Corp bonds have widened by 25-30 bps since late summer, and several warnings that corp debt may not be as easy to roll over, in spite of strong equity prices.
–China’s currency a bit weaker this morning on last week’s rate cut.  Several commodities got a brief lift from China, but have faded.  For example, Corn jumped early Friday but was crushed into the close and was lower yesterday.  Copper had a short bounce but now finds itself around $3.00.  Shanghai rebar contract is probing new lows.  My thought is that some parts of the market are fading the thought that China can revive its flagging economy, though I would note that other base metals, (zinc, nickel) are firming up.  More importantly, China, like others, has an incentive to meet Japan’s challenge of currency depreciation.

Posted on November 25, 2014 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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