Odds and ends
Sept 24, 2019
–Markit Composite PMI for the US was 51.0, a slight improvement over last month at 50.7, but still near the low since 2016. European data was weak as well, sending yields sharply lower in the early part of the session with the green euro$ pack (3rd year) up 11.5 bps at the high. Profit taking ensued, and net gains were shaved in half. In euro$’s reds +5.25, greens +5.5 and blues +5.625. The ten year yield fell 3.8 bps to 1.706%. Oct/Nov FF spread settled -13.0, unchanged from Friday, indicating around 50/50 odds for another 25 bp cut at the Oct 30 FOMC. Fed effective on Friday was 1.90% and FFU9 settled 97.95. If EFFR is 1.90 the rest of the month then final should be around 97.9525. In other words, the market isn’t overly concerned about a huge qtr end spike. Implied vol was firm.
–Although not a large trade, EDZ0 9800/9900 risk reversal is somewhat interesting; 4k sold at 5.5 and 6.0 as EDZ0 was trading 9852.5 to 98.535. Settled 5.0, call over, vs 9851.0, 13.5 call, 27 delta and 8.5 put, 22d. Skew heavily favors calls, even as EDZ9/EDZ0 calendar approaches -50 (settled -48.5, -2.5 on the session). In other words, there is a decent amount of ease expectation already built into the curve, but the fear remains concentrated on the idea that a market jolt sends rates down hard and fast, while downside is limited in a world of negative rates. In tens, there was a buyer of TYX 130/131 c 1×2, paying 5 for the two legs. This came back down and settled 1, 53 and 27, with a positive delta of 12. The thought here is that vol will jump on moves to lower yields. Nov expiry is 25 Oct, and there are many possible catalysts in that time frame.
–Volume was light yesterday and will likely be the same today. Two year auction; w/i was 1.66/1.655 at futures settlement.
