Short end might be frozen…but maybe NOT the long end

–A WSJ headline analyzes: ‘The Fed’s Mysterious Pause’.  There’s nothing particularly surprising about it.  Housing is weak, europe has softened, and yes, the US stocks market took a dive in December.   The Fed doesn’t WANT equity values to have an out-sized influence on spending and investing, but that’s how it has been working.  Yields dropped in the wake of the FOMC, gold jumped, the dollar fell, curve steepened.  The ten year yield fell 2 bps to 2.692%.  2/10 treasury spread rose 2.3 bps to 16.8 as the two year fell 4.3 to 2.524%. 5/30 spread rose 5.3 bps as the thirty year bond actually edged up 1 bp in yield to 3.053%.

–In euro$’s reds were the strongest part of the curve, closing +5.25 (grns +4.25, blues +3.125).  An idle Fed has been projected into the fall with this type of trade: A buyer of 30+k EDU9 9712/9725/9737/9750 call condor for 5.5.  Max profit is 7 between 9725 and 9737.5.  If one thinks the Fed is now completely out of the picture it’s understandable with EDH9 settling at 9734 yesterday….but that’s a LOT of time to grind out 7 bps with an unpredictable environment ahead.  Jan 2020 FF contract settled 9759.5, just one-quarter bp lower than Jan’19…  a Fed as frozen over the next year as this morning in Chicago.  But we know a thaw is coming….in May.

–As mentioned over the weekend and yesterday, the Fed kicked details of balance sheet reduction modifications down the road (March FOMC).  But this is a market that doesn’t require details.  What will be interesting now is the back end of the curve.  The downside move in the dollar SHOULD be an engraved invitation to buy curve.  Worth noting as well are TBAC minutes that indicated some uneasiness about borrowing plans (needs) of the Federal gov’t going forward.  Are non-domestic entities going to be load up on dollar assets without the Fed’s support in the form of rising short rates??  It does NOT seem like US vol should be at the very bottom of the historical range here.  

Posted on January 31, 2019 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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