May 17. I dunno if she can take any more, Captain
–The grind to higher yields continues. At the futures close tens were up 1.5 bps to 3.09% and edged higher thereafter, with continued put buying. For example, there was a late 20k block buy of TYN 117.5 put vs TYM 11817 for 20/64. In euro$’s red to green calendar spreads eked out new recent highs, with the pack spread +0.75 to 12.375.
–Article on Bloomberg cites Fitch as warning about vulnerability of EM due to high levels of debt as the Fed is expected to continue to hike.
https://www.bloomberg.com/news/articles/2018-05-17/fitch-says-emerging-markets-vulnerable-as-debt-hits-19-trillion
Concerns about Italy are also resurfacing with the new government, with heavy selling of btp contracts, though the ten year yield in Italy remains 100 bps below that of the US. The global system is showing increased signs of stress.
–EDM19 trades a new low of 9705 this morning. A few days ago there was commentary concerning the size of open interest in the midcurve 9712.5 puts (now 477k OI), but it looks like the 9700 put will be the strike of interest shortly (403k OI). 0EM 9700p settled 2.75 vs 9706.5 with 29 days to go. The question now is whether shorts (long put holders) are anxious to monetize, or whether they press. We’re just one 3.0% Average Hourly Earnings print from a cascade lower. There are almost always buyers of puts in front of employment reports, and although the next NFP is two weeks away, there’s likely to be heavy trade in June midcurves between now and then.
–In terms of the very front end, the fever seems to have broken with respect to the lib/ois compression. EDZ/FFF9 popped up 1.5 bps to 37.5 yesterday and EDM8 fell 3 bps. EDU8/FFV8 closed at just 33. Risk/reward heavily favors the upside in this spread.
