Nov 20. Fear moves from a creep to full trot
–For the seventh day in a row, FVZ and TYZ closed higher. Ten year cash yield eased 1.6 bps to 305.6. From the middle of May going into the Italian elections there was also a big decline in yields, from 2.94% to 2.585%, a rapid fall of 35.5 bps. Recent high has been 3.24%, so the current move has been around 20 bps.
–All near eurodollar calendars once again made new lows, with EDZ8/EDZ9 down 3 bps to 31.5 and EDH9/EDH0 down 2.5 to just 22.0. However, the treasury curve steepened with a new high in 5/30 to 45, (+1.5 bps) and 2/10 added 1.1 to 27.5. On the euro$ curve reds were once again the star performer closing +4.0, with greens +3.375, blues +2.375 and golds +1.5. The market has taken the Fed’s hint of a pause and run with it…of course the deterioration in equities and housing underpins the macro view. (Housing Starts today). Good buying in 0EZ 9725c for 1.5 (38k positions added) and there is consistent buying of 3EU 9800c which settled 4.5 and now have 185k open. Someone’s looking for armageddon, and the NY FANG index which is off over 22% from the high and plunged 4.25% yesterday, is trying to fit the bill.
–Near term fear is underlined by firmness in nearer contract vol. Red atm straddles are now virtually equal to blues nominally (reds through blues at-the-money are now all the 9700 strike). Greens hold the most value. For instance there was a late buyer of 2EM/3EM 9700 straddle spread for 2.5, 5k. 2EM 9700^ settled at 48.0 vs 45.5 in blue. Example: 0EH 9700^ 33.0s, 2EH 9700^ 35.5 and 3EH 33.5.
–Feb/April FF spread settled 13.0, down 0.5 on the day and still indicating better than 50/50 for a March hike. Seems a bit expensive relative to EDH9/EDH0 at 22, or EDM9/EDM0 at 10.5.
