Sept 6. Payroll day
–Employment data today with nonfarms expected +175k, rate of 7.4, hourly earnings +0.2. Rates continued to march higher with tens up 8 bps to 2.975. Near eurodollar calendar spreads hit new highs, with EDZ3/EDZ4 climbing above 1/2% to 54.5, up 6.5 on the day. However, back spreads declined. Green pack was weakest -13.125, blues -11.375 and golds -8.875. 5/30 treasury spread edged to a new recent low of 204.5. I recall late in 1994 tightening cycle that back spreads collapsed, I think it was reds to greens back then, after a 75 bp hike. Now we’re getting the same cyclical move in the curve without the Fed ever having actually done ANYTHING.
–From the low just below 1.40 in July 2012 to current level of nearly 3%, ten year yield has more than doubled. In the past 35 years there is only one instance of this: 1977 to early 1980, from 6.8 to 13.6%. Honorable mention was a spike crisis low of 2.07 in late 2008, to a high of 3.95 in June of 2009. The yield rise in 10’s in late 1993 to late 1994 went from 5.17 to 8.0 (associated with Mex peso devaluation and other financial dislocations). The point is that financial conditions are tightening, and the market has little confidence that a new Fed can adhere to forward guidance.
–While straddle levels in eurodollars have swelled on this move, with the last red straddle again nearing 100bps (EDM5 98.625^ 95.5s), VIX edged a bit lower yesterday to only 15.6.
–While the back end of the curve flattened and selling pressure concentrated on greens, there was a notable new curve trade in options of 100k contracts. Sold red midcurve Oct 9912/9950 strangle and bought blue Oct 9675/9650ps for credit of 1.5. As of settle, the red put is 2.5 bps out of money, while blue is 23.5 out.
