Bullard fever broke
February 16, 2022
–Eurodollar straddles sank yesterday as panic buying came to an end. A few examples: EDM2 9875^ settled 49.0 on Monday and 40.5 yesterday. EDZ2 9800^ settled 85.5 vs 9801 on Monday, and 76.0 vs 9804.5 yesterday. The eurodollar curve, which had been pounded into inversion on Bullard’s front-loaded comments, suddenly floated back up, with red/gold pack spread +6.75 on the day (reds unch’d and golds -6.75) to -4.75. Still inverted, but less so. All this, despite PPI at a scorching 9.7% yoy. Bids came into the front end, with EDM2 and EDU2 the strongest performers on the strip, both +5.0 to 9875.0 and 9835.0. Two-year open interest fell 40k as selling pressure abated in the front end, all other treasury futures showed gains in OI.
–With TYH options expiring Friday, the huge position in TYH 127 puts has been whittled down, with sales rolled into lower delta TYJ puts. TYH 127p now have only 166k open, having been well over 300k, and a delta of -0.97 vs TYH settle of 125-23+. In April the highest OI strike is 126, which settled 1’09 with -0.55d and 95k open. Several factors suggest that the long end of the curve will come under renewed selling pressure, though it might be just after March option expiry. First, the short end selling has peaked, and with it, curve flattening trades. As we move towards the March FOMC, odds of 50 will likely be pared back, with Brainard and Williams slated to speak at the end of the week. For now, there is a slight de-escalation in Ukraine, so flight-to-quality bids may ease. The BOJ today said it has no plans to change its 25 bp yield cap, “We have no plan now to change the band. But that’s not to say the band cannot change forever,” Kuroda told parliament. Implicit or explicit yield caps are likely to go the way of Australia’s if inflation remains high.
–Today brings Retail Sales (exp -1.9% m-o-m) and Industrial Production, followed by a 20-yr auction and the Fed minutes.
