Oct 16. Not working anything “with a tick” today !

–Well the Fed’s portfolio is doing pretty nicely. So there’s that.
–It was a historic day yesterday where markets became unhinged on record volume. Ten year yield spiked to 1.85 before coming back late in the day to 2.13, and is just above 2% at this writing. Fives ended the day down 11 bps at 134. Colleague John Brady pointed out a piece of Merrill research dated Aug 1, 2 1/2 months ago, with the tagline “The Death of Volatility…” As the Fed repressed rates, investors felt forced to take more risk, or to take bigger positions with more leverage. There were already hints of volatility spikes in FX markets prior to yesterday’s fireworks, and there had been large commodity moves as well. In a world of cross-asset investment strategies, where banks have come under regulatory attack as liquidity providers, it’s no wonder that crazy markets result, and laborious efforts to squeeze out a few extra bps of portfolio return (by selling option premium), instantaneously went up in smoke. And there is clearly more to come. While there might still APPEAR to be tight bid/ask spreads due to machines that trade in milliseconds, the actual quotes for humans will be wider, especially in options. There is still ebola risk, there is still geopolitical strife.
–Volumes were staggeringly large; new records. Eurodollars over 11 million contracts. ten year treasuries 4 million and fives just under 2 million. According to prelim open interest data, euro$’s lost 442k of positions, tens gained 21k and fives fell 118k. Eurodollar calendar spreads made new lows. Peak one year calendar EDZ15/EDZ16 plunged 12 bps to 85. However, I marked 5/30 spread at a new high of 157 bps, as thoughts of Fed ‘normalization’ go out the window and fives re-adjust lower. What’s normal for fives? Probably under 1% given this environment.
–Here are some quotes for at-the-money ten year straddles yesterday: Pre-open, TYZ 128.0^ ref 127-275, 1’62/2.00. As the rally picked up steam after data, 128.5^ vs 128-12, 2’08/2’12. 129^ at 128-25, 2’20/2’25. Later in the day after the huge futures price spike, 129^ trade 2’49. Someone came in and expressed a view, selling thousands from 2’37 to 2’30 covered at various levels down to 128-18. Final settle of 128.5^ vs 128-18 was 2’24.

Posted on October 16, 2014 at 6:50 am by alexmanzara · Permalink
In: Eurodollar Options

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