Oct 21. If stocks continue to rebound, then 5/30 should steepen

–Yesterday’s trade continued a reversion to “normalcy” after last week’s carnage.  Stocks continued to rebound after early weakness related to IBM results.  Implied vol was lower in interest rates, with TYZ 128 straddle back down to 1’44, around the same absolute level as before the fireworks.  For example, on Friday Oct 10, the Dec atm straddle (126.5) in TY was 1’43 and FVZ 119.5^ was 0’63.  Yesterday FVZ 120.25^ settled 0’63 from 1’05 Friday.  Yields on the high yield ETF’s continued to edge lower on both an outright and spread basis.  But while some measures indicate a return to complacency, treasury yields are grinding lower, with the ten year yield down 2 bps yesterday to just under 218.  August 2015 Fed Fund contract settled at just 21 bps, 9979, up 3 on the day, as the market prices out possible Fed hikes.  (There are 5 FOMC meetings in 2015 prior to the August contract).  May 2015 FF are at 11.5 bps, 9988.5, +1.5, and there are three meeting prior to that contract. Similarly, the one year calendar spreads in dollars have compressed, with the peak, EDZ15/EDZ16 at just 89.5 bps, down 0.5 on the day.
–With Fed tightening being priced out of the market, one would think the longer end of the curve would steepen.  However, 5/30 spread gained just 1.5 to 156.5; the one month high is 157.5.  Apparently, the drop in inflation expectations is keeping a lid on the long end, with 30 yr bonds still below 3%.
–Business Insider yesterday cited Stanley Druckenmiller’s comments about a month ago that IBM was the “poster child” for financial paper games in the corporate sector, noting that it had taken on a large debt load, not for capital expenditures but to buy back stock.  It looks like that strategy has finally run out of gas.  At the same time, the regulator of Fannie and Freddie, Mel Watt, is pushing for less stringent mortgage requirements with just 3% down payment.  Taking on higher debt loads is NOT the answer to fix stock or home prices.

Posted on October 21, 2014 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

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