April 18. Flatten curve, sell vol – repeat
-Once again new lows in the curve with 2/10 treasury spread at 42.5 bps and red/gold pack spread down to 8.25 bps. Beige Book is released this afternoon, and while it’s likely to indicate continued growth, the back end of the curve questions the sustainability. The Beige Book is in preparation for the May 2 FOMC meeting, where nothing is expected as May FF contract trades 9831.0, exactly at the current 1.69 Fed Effective rate. However, the July FF contract at 9809 suggests around 90% odds of a hike at that meeting, and Jan’19 FF at 9779 is 52 bps higher than the current FedEff (suggesting 2 more hikes are a lock).
–The market appears very comfortable with this idea of 2 or 3 more hikes for the year, which makes for a flatter curve and a decline in vol. Premium sellers on display right from the open with new sales on EDZ19 underlying: About 10k 0EZ 9712^ sold at 37.5 (settled 37.0, -1.0 on the day), and EDZ9 9712.5^ vs 9812c sold at 49 to 48.5 in 15k. These premium sales are extending out to the longest maturities, with notable action in Sept bond options. There has been a consistent seller of USU 143 puts (open interest now 24k) and 150 calls. Total OI in Sept bond options now near 70k, a huge amount for this time in the cycle and well above TYU options. US implied is just 6.6 in June and 6.8 in Sept. (USU 145^ 4’42s).
