Aug 24. Surprising decline in yields
–Yields fell Wednesday, with the ten year -4.4 bps to 216.9. Some back month euro$ contracts made new highs for the move, for example in the 2022 contracts (last golds… 5 years hence). In the near part of the curve, calendar spreads made new lows. For example, EDZ17/EDZ18 settled at a new low of just 23.5, and January18/19 Fed fund spread settled at just 20. The treasury rolls were much more active as well, and those spreads also declined. For example FV U/Z went from 9.5 to 8.75 trade late in the day, and TY from 9.75 bid first thing in the morning to 9.0 trade late.
–Longer yield curve spreads also declined. New recent low in 2/10 to 86 bps (-3.1 on the day), and the red/gold pack spread in dollars settled just above 53.
–There was one notable block buyer of a calendar: EDZ19/EDZ20, buyer of 40k for 17.0. The spread settled there, and the position appears new, with an open interest increase in both contracts, up 31k in EDZ20. On the option side, there were several trades that are synthetically long spreads with a bias toward the Fed remaining on hold. For example, variations on +EDZ7 9862c and selling 2EZ 9850c.
–While stocks didn’t give impetus to ‘flight to quality’ buying, it appears as if the political theater and attendant risks of a gov’t shutdown are creating uncertainties. Typically, directional moves are confirmed on heavy volume, increases in open interest and steady to higher vol. While volume was light, open interest rose across the curve and implied vol firmed slightly.
–Jackson Hole conference starts today. Yellen speaks tomorrow. Sept treasury options expire tomorrow (large replacement of expiring wings occurred yesterday, with +30k TYZ 114p and +100k FVZ 112.25p for cab-7 on each).
–Below is chart of 2/10 in white and red/gold ED pack spread in amber. Red/gold at a post election low of 53. 2/10 traded sub-80 bps after the June FOMC hike, bounced, but is now back to just 86.
