Jan 24. Surprising short cover rally
–Heavy volume associated with the rally in eurodollar futures yesterday. Total 4.6 million traded, but open interest was down 220k with only EDM8 posting an open interest rise over the first 12 quarterlies. EDM7 open interest fell 77k and EDZ7 62k (EDZ had heaviest volume on the strip at 570k). Similar story in tens, heavy volume of 1.6m but open interest down slightly, falling 6k as cash tens plunged 7 bps in yield to 2.40%. Lifting of hedges? In any case, the curve edged flatter, with 2/10 in 2 bps to 125.6. Some of the near ED calendar spreads traded remarkably low levels, for example Sept7/Dec7 went 14 offer and settled there. June7/June8 fell 2.5 bps to close at just 49. If there was substantial pricing of Fed tightening on the curve, short cover buys would be understandable, but EDZ7 closed 9850.5, only 50 bps lower than the final settlement of EDZ16. Can we really be sure of only two hikes over the year? It doesn’t really cost much to take the ‘over’, as several option plays suggest…
–On the option side, bearish trades continue, as buying put spreads, selling calls remains popular. Yesterday the midcurve March (0EH on EDH8 underlying) 9850 calls were sold vs buying 9825/9812 p spreads and 9837/9825 p spreads; the contract settled at 9839 with options expiring March 10, just prior to the March 15 FOMC. Similar trades occurred in Green Sept and Green Dec midcurves.
–The dollar index slid, trading 100.19, well through the old highs set in 2015. JPY was trading late at 112.75, though this morning it has bounced back to 113.40. A strong dollar has been one of the factors suppressing inflation…
–Two year auction today, followed by 5’s and 7’s Wednesday and Thursday. Feb treasury options expire Friday.
