Two short-end interest option trades lean in opposite directions

May 20, 2022

–Yields declined on yesterday’s equity market weakness, with ESM having tested the previous week’s low of 3855; yesterday’s low was 3856. May opex in equities.  The ten year fell 3 bps to 2.851%, though TYM2, with a settle of 119-225 was well off the early morning fear-induced high of 120-10.  EDZ2/EDZ3 traded as low as -5 but came back to settle -0.5 (9686/9686.5), a new closing low and the nearest 1-yr spread to have inverted.  The Fed stoically vows to ignore asset prices in its inflation-fighting campaign, but it may become impossible to dismiss other data.  For example. existing home sales -2.4%.  From NAR’s chief econ Lawrence Yun, “higher home prices and sharply higher mortgage rates have reduced buyer activity.”  From WSJ: “The share of subprime credit cards and personal loans that are at least 60 days late is rising faster than normal, according to credit-reporting firm Equifax.  In March, those delinquencies rose m/m for the eighth time in a row, nearing their prepandemic levels.”   China cut its 5yr Loan Prime Rate to 4.45% from 4.6%, widely seen as a measure to support the real estate sector.  In the US, a friend was just quoted 5.75% for a 30y mortgage loan…

–Open interest in EDN2 9737.5 call sprang to life with a new buyer early yesterday.  The call settled 12.5 with open int +62k to 66k.  EDU2 settled 9736.5 or 2.635%.  This option expires on EDU2 on July 15, before the July FOMC on July 27.  From settlement, breakeven is 9750 or 2.5%.  If the market’s perception shifts to the idea of two 50 bp hikes and then a long pause, with EFFR stalling at 1.83%, then EDU2 could easily surpass 9750.  Another notable trade in the opposite direction, a buyer of 15k 0QM3 (mullet) 9550/9500p spread for 5.0.  This is a midcurve option which expires in June’2023 (13 months) based on SFRM4 (2yrs forward) which settled 9728.5 (and was around 32 when it traded).  So the top strike is 4.5%, but the contract itself is forward enough that perhaps the idea of persistently higher inflation will have taken deep root.

Posted on May 20, 2022 at 5:52 am by alexmanzara · Permalink
In: Eurodollar Options

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