January 5, 2022

–Yesterday the DJIA was up 214 points and Nasdaq was down 210 points (+0.6% and -1.3%).  The red pack in euro$’s (2nd yr) was up 3 bps, and the gold pack (5th yr) was down 4 bps.  Markets are undergoing asset rotation to start the year.  Long duration big-tech is pressured by the rise in yields.  In just two days, the red/gold pack spread has jumped 13.75 bps from 36.75 to 50.5.  The 2/10 treasury spread has had a similar move, steepening from 76.7 on the last day of 2021 to 90.1 yesterday.  The ten year treasury yield was up another 4 to 1.663%; the high of last year is 1.74% which had been tested a couple of times and now presents formidable resistance.  However, there have been TY put buyers in size in the last two days.  on Monday it was mostly TYH 127p which settled unchanged at 16 vs 129-09, but have peak open interest of 240k.  Yesterday there was heavy buying of TYH 127.5/125.5ps with OI in both strikes up about 30k (settled 22 and 7).  DV01 on the TY contract is currently about $81, so 1 point in futures is around 12.3 bps given parallel curve shifts.  With TYH 129-09 and ten-yr cash yield 1.663%, we can very roughly call the 125.5 put about 50 bps away (46.7).  Does the financial system implode if the ten year yield goes to 2 1/8% ?  I don’t think so.

–Red/green (2nd to 3rd yr) euro$ pack spread settled at a more respectable level of 31.25 bps, having languished around 21 to 24 for the last half of December.  EDH2/M2/U2 butterfly settled 2.5 having been around 4.5 into year-end.  EDH2/EDM2/EDU2/EDZ2 condor had been around +1 to +1.5, settled -1.5 yesterday, 23.5 in EDH/M and 25 in U/Z.  

–News today includes ADP expected 400k before Friday’s Employment report.  Also, FOMC minutes are released, but prior to that the NY Fed engages in treasury purchases of $2.4b 7-10 years and $1.8b of 22.5 to 30 years.  Next week we’ll be treated to Congressional hearings on Brainard and Powell which could give hints of policy in 2022.

Posted on January 5, 2022 at 4:57 am by alexmanzara · Permalink
In: Eurodollar Options

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