Odds and ends
March 20, 2019
–FOMC day. Dots and balance sheet plans will be scrutinized, with an expected announcement of a schedule to end balance sheet run-off. A decision regarding the maturity of the Fed’s holdings is likely further down the line. The Fed has consistently warned of risks relating to a global slowdown, which was on display with the earnings release by Fed Ex, which fell 4.6% after hours. The company cited, in part, slow global trade. As an aside, Dow Jones Transports had an outside day and closed lower. Unlike other indices, the rally in DJT through February failed to reach December’s high, and this last move up failed to reach February’s high.
–Yesterday’s action in rates was quiet, with net changes pretty much within 1 bp of the previous close. It’s somewhat interesting that the last two red midcurve straddles settled identical to the last two greens; 0EZ and 0EH 9762 straddles settled 40 and 47, as did 2EZ and 2EH 9762 straddles. Nominally green premium has been the highest, so current levels might indicate a flatter curve over the short term. Also worth a mention is that 0EU 9762^ on EDU20 is a half basis point higher than 3EU 9762^, 31.5 vs 31.0. My inclination would be to buy blue/ sell red (THIS IS NOT A RECOMMENDATION). The long bond contract (USM9) may provide a decent indication of how the market perceives the Fed and the economy going forward. There is heavy resistance in the contract at 146-16, just under 3% in terms of yield. A few closes above that level would signal slowing inflation and growth.
–Quick note on CME stock. The CME this month announced plans to charge a fee on collateral holdings, for example, when t-bills are deposited for margins. Seems as if the exchange is trying to squeeze revenue wherever it can as open interest levels have stagnated. Total exchange open interest one year ago to yesterday is down around 6% as the Fed has helped stifle activity.
–One last note concerns the article below and student loans. The White House is proposing a cap on student borrowing. Key passage: “Underpinning that idea is a belief that colleges are largely responsible for the nation’s debt woes. The WH says easy access to federal aid has led colleges to drive up prices. adding that they are ‘unable or unwilling’ to make education more affordable.”
on March 20, 2019 at 8:16 pm
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Hi Alex,
Can you explain the quoting convention for the mid-curve options?
I would have thought the reds had a 1, greens 2, blues 3 etc. Also do they expire at the end of the quarter?
Thanks,
Bones
on March 21, 2019 at 5:14 am
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Hi Bones
Red midcurves are 5th thru 8th quarterlies, (2nd year forward) and the symbol is E0 or 0E on Bloomberg. Greens, 3rd year, are E3 or 2E, Blues 4th year are 3E and golds are 4E. They expire the Friday preceding the front quarterly. E.g. EDZ19 expires on Monday, 16-Dec, 2019. The midcurves (all Dec midcurves) expire on Dec 13, 2019. If in the money, they automatically are exercised into futures. 0EZ would get EDZ0 futures, 2EZ would get EDZ21 futures etc. Hope this helps.
on March 21, 2019 at 10:07 am
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Hi Alex,
Thanks that helps alot – I guess I was just expecting reds to be E2 or 1E to follow the pattern of the rest, but this makes sense.
I’ve been following your blog since last year after being pointed to it by Macro Tourist and I have to say I do appreciate your insight – it’s been learning fun to learn about futures, spreads and STIRs.
All the best,
Bones