Sept 26. Red/green euro$ steepeners in front of the Fed

–FOMC day.  The market has been ratcheting up odds of forward hikes.  The most striking adjustments have been further back on the curve.  As mentioned previously, as recently as 1 1/2 weeks ago EDZ9/EDZ0 was trading -2.0; yesterday it traded as high as +5.0 on volume of 100k with a clip of 50k bought 4.5.  The spread settled 5.0 but came back to a 4.5 offer late.  These are new buys , with open interest +58k in EDZ9 and +35k in EDZ9.  Steepening on this part of the curve is significant in front of FOMC, although, Fed projections for FF from the June meeting were 3.1 for the end of 2019 and 3.4 for the end of 2020.  In other words, the Fed has 30 bps penciled in while the euro$ spread is 4.5.  The projections for end of 2018 and 2019 were 2.4 and 3.1, so 70 bps, vs current EDZ8/EDZ9 spread of 49.5 (late sale of 20k there).
–It’s worth noting that Dec’19/Dec’20 euribor spread has also surged.  In late May  due to Italy concerns, ERZ9/Z0 settled as low as 28.  It quickly rebounded to 40 in early June, and then fell back to 28 by mid-August.  Yesterday it settled 40.5.  Are we in the midst of a synchronised repricing?
–Language in the FOMC statement will likely be altered from “The stance of monetary policy remains accommodative…” to something more restrictive.  Not quite neutral but closer to it.
–There were sizable option trades yesterday that also supported the theme of forward steepening (plays noted below).  Most conspicuous were large new sales of the 9675 put in both 0EX and 0EZ (thus supporting EDZ9), and put spread buys in EDM20, EDU20 and EDZ20, rolling down shorts from the massive put ratios seen this summer.  Simultaneous with the 0EX 9675 put sales at 4.0 were purchases of TYX 118 puts for 19/64’s.  Perhaps unrelated, but still fit the steepening narrative.

Player themes:  Rolling of long dated puts:
+30k EDM20 9612.5/9587.5ps v 76.0, 10d 4.0

+20k EDU20 9625/9587.5ps v 79.0, 10d 7.5

+70k EDZ20 9587.5/9562.5ps v 76.0, 5d 3.5

(open interest in all upper strikes declined, and rose in lower strikes.  As the sell-off has pumped up the open ended put ratios, the shorts are being moved lower)

Possible steepener:
-50k 0EX 9675p vs 83 to 84.5 at 4.0 (open int +42k)

+20k TYX 118p 19/64 (open int +12.7k)

-200k 0EZ 9675p 5.5 vs 83 to 84, 37d (open int +193k to 667k)

Posted on September 26, 2018 at 5:21 am by alexmanzara · Permalink
In: Eurodollar Options

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