Oct 30. Rates pushing higher in US, but the move will likely stall

–In spite of Q3 coming in at only 1.5% with prices +1.2%, interest rate futures continued to sell off.  Ten year yield jumped 8.4 bps to 217.4.  Interestingly, the curve was a bit steeper as 2 yrs only rose 2.2 bps to 72.5.  Red/gold pack spread gained 1.75 bps to 122.625.  There was a large exit sale of 0EZ 9900p at 9.0 bps, however, straddles remained well bid with a late trade in 0EZ 9900 straddle at 19.0.  Another large trade on the day was a buyer of 50k EDM16 9912/9900p 1×2 for 1.0, paying for the 2 legs.  According to prelim sheets, both options gained open interest, 41k and 77k.  In treasuries, implied vol is still rather muted.
–Near eurodollar calendars made new highs, for example, EDZ5/Z6, EDH6/H7 and M6/M7 all closed at 59.5.  So these spreads are currently indicating 2 to 3 hikes of 25 bps per year.  If the Fed were to hike at the next three quarterly meetings in Dec, March and June, then the above mentioned June put spread would probably work out.  But the one-year calendars aren’t really indicating the same tightening path, nor is the Fed.
–The Bank of Japan refrained from further stimulus.  US news today includes Personal Income and Spending, both expected +0.2, ECI at +0.6, Chicago PMI at 49.2 vs 48.7 last.  Fed speakers include SF John Williams (10:00 EST) and KC Esther George (11:25).  George is rather hawkish, but a note published on the KC Fed website Oct 27 had these conclusions about the agricultural economy (relatively important in the KC district).
“Uncertainty abounds, but the risk profile of U.S. agriculture has increased, and appears poised to increase further.  Current conditions highlight liquidity as a key indicator of future financial stress in the farm sector.  Cash flow is steadily becoming a more significant concern.”
Further a USDA report today noted that ag “Prices Received Index is down 8.4% yoy.  Food Commodities index…is down 13% from September 2014.”  http://www.usda.gov/nass/PUBS/TODAYRPT/agpr1015.pdf
–Obviously i-phones are much more important than food, and you can take pictures of food with your i-phone, which apparently has become critical, however, stress in the ag sector and other businesses tends to work its way through the system slowly, and requires a longer time to heal.

Posted on October 30, 2015 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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