The fundamentals looked stable….

Interest rate futures continue to be well bid, with calendar spreads compressing.  Ten year yield fell 1.7 bps to 175.8 in spite of auctions this week in 3, 10 and 30 years.  Sept’16/Sept’17 euro$ spread fell 1 bp to 22.5; the first ten one-year spreads are between 21.5 and 25; little slope and repressed volatility (more on that below).

–October FF settled 9954.5, the highest since late February.  January’17 FF settled 9948.5, only 15 bps higher than the front May; there are 5 FOMC meetings prior to January.
–There was (delayed) talk yesterday about large hedge fund losses that occurred as a result of a soybean calendar spread, July to Nov.  In looking back historically, it doesn’t appear as though recent volatility in this spread is huge in comparison to former years.  Which brings us to the point: there was almost no movement in the spread from last November to April, it traded in a sideways range of about 5 cents.  As colleague SB mentioned to me, lack of movement “lulled everybody to sleep.” Then, in late April, it surged 30 cents instantaneously on perceptions that carry-overs and the crop from SA might not be as large as expected.  Apparently it’s beyond the purview of Central Banks to limit ALL volatility.  Obviously, narrow and clearly identified ranges require larger position size to extract profits.  Then KABOOM.  It happens all the time in markets, seismic shifts.  Just that it has been a while since it has occurred in interest rates….
–NFIB small business optimism today (it’s been declining) and JOLTS (solid labor markets).
Posted on May 10, 2016 at 5:24 am by alexmanzara · Permalink
In: Eurodollar Options

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