Sept 19. Turnaround Tuesday
–Large trades Monday were primarily TY put buyers. TYX 124p 6 paid 6k cov 126-075 (6s vs 126-02+). Just prior to that on block TYZ 124p 12 paid 13k cov 02+ with 11 delta (13s). Later blocks followed, 19 paid for 23k TYZ 124.5 p cov 03 and 03+ (18s). These trades appear to be hedges for the FOMC; open interest up 13.6k and 18k in Dec puts. Straddles didn’t budge. Indeed I marked USZ 154 straddle at just 7.3 vol, a new recent low (3’56s). The market does not seem to fear a move to higher rates, with the ten year yield closing at 223, up 2.8 bps on the day, right at a resistance trendline in terms of yield, as shown on attached chart. Today has all the makings for a ‘turnaround Tuesday’. With hedges already set, selling pressure should abate (temporarily). An article on Bloomberg today suggests that balance sheet adjustment may be bullish for treasuries, in that yields tended to rise during QE, so the opposite may occur with an unwind. https://www.bloomberg.com/news/articles/2017-09-18/wall-street-s-bond-gurus-have-it-all-wrong-as-qe-unwind-looms
–However, the larger trend appears to favor a move to higher rates.
–The eurodollar strip had a parallel shift lower, with EDZ7 to EDH22 down 2 to 2.5. Odds for a rate hike at the December meeting are now essentially 50/50 with Jan’18 FF contract settling at 9872.5. Ten year note to inflation indexed TIP edged to a new high of 188.
–News today includes Housing Starts 1174k. Import and Export Prices.
