Sept 21. Sentiment tweak

–Curve flattened Thursday as front end dollars reacted negatively to a higher 3m libor setting (+1.3 bps to 2.3664).  EDZ8 fell 2.5 to 9732.5 on long liquidation, while FFF9 was unchanged at 9762.5, so this spread settled at 30.0.  Equities floated to new highs in front of today’s quad witching.

–The nadir of one-year eurodollar calendar spreads was EDM0/EDM1 which settled -5.5 one week ago.  Yesterday, this spread settled -2.5 (a new recent high) as spreads from reds to greens perk up.  EDZ9/EDZ0 settled at a new high of +2 (+0.5 on the day), having flipped from -2 last week, on volume of 36k.  The curve inversion from reds to greens to blues has been sending a signal of an economic slowdown in late 2019 to 2020.  If these calendars start to roll into positive territory, it signals a sentiment change, either on growth or inflation.  On a related note, I marked the ten year treasury to inflation index note at a new recent high of 215.4 bps.   In my years of watching this spread, I don’t find any predictive power, but it’s within a few bps of the year’s high at 219, so worth a mention.

–One interesting exit trade was EDZ8 9725p vs 0EZ 9662.5p, with paper paying 0.5 for 45k, buying the 0EZ put.  The market appears a little more sensitive to the idea that there’s open ended risk on reds and greens.  This is perhaps, exemplified by settlements of some of the long dated put ratio trades.  In mid-July EDZ0 9600/9550 put 1×4 traded flat 25k x 100k, paper sold the 9550 puts.  Yesterday the settlements were 10.25 and 3.75, so 4.75 to the 9550 puts.  Next week brings the September FOMC meeting.  I had thought there might be softening of language regarding the trajectory of hikes, but with stocks and labor markets strong, that idea was misguided.  Brainard last week noted that the Fed thinks stocks are overvalued; it’s likely that the Fed is more willing to lean against the trend.

Interesting link on Japan 30-year yield pushing to a new high near 90 bps…

https://www.bloomberg.com/news/articles/2018-09-21/boj-cuts-purchases-of-super-long-bonds-for-first-time-since-july?srnd=premium-europe

Posted on September 21, 2018 at 5:22 am by alexmanzara · Permalink
In: Eurodollar Options

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