ECB day
July 21, 2022
–Relatively low volume on Wednesday, but after a strong open there was selling pressure in rate futures throughout the day. For example, TYU opened the US session just above 118-16 and settled 117-25, despite a well rec’d 20 year auction (3.42% vs 3.445 just prior to auction). The 30 year future settled 138-16 vs 138-18 on Tuesday, but I marked the cash yield slightly lower yesterday at 3.166%.
–ED straddles were noticeably higher, especially in reds. As an example, EDZ3 was unchanged in price at 9667.5, but the EDZ3 9662.5 straddle settled 151.25 on Tuesday, and 155.75 yesterday. ECB is today, and with Draghi’s resignation, a bond fragmentation mechanism is likely to be more contentious (more necessary, but fraught with much higher risks). Rising premiums on US short end rates might also reflect spillover from China’s credit crisis. Spreads between SOFR and ED contracts prior to the libor transition are firm, with U3 and H3 spreads around 29-29.5. Yesterday I marked the SFRZ2/EDZ2 spread at 38; if it starts getting above 40 it’s worth watching, though there will likely be plenty of other signs of cracks. Buyer yesterday of 15k SFRZ2 9600/9550/9500p fly, settled 5.75 vs 9645. This is exactly the time that it’s preferable to own Dec eurodollar vol relative to SOFR. EDZ2 9550p settled 14.0 vs 9607 (57 otm), while SFRZ2 9593.75 also settled 14.0 vs 9645 (51.25 otm).
–5/30 flattened to a new recent low of -1 bp vs a recent high of 23. The lowest level has been -17 from mid-June.
