Oct 27. A few technical notes; FOMC and ED quarterly expiration dates
–7 yr auction today. AMZN and Alphabet report. Note that the Russell 2000 (small caps), closed at their lowest level since early August. Not exactly a ringing endorsement for all stocks. RTRS: ‘Kuroda said on Thursday the central bank would not try to push down super-long government bond yields – even if they rise further – because it is focused on controlling the yield curve for out to 10 years.”
–A trade that occurred Wednesday was a buyer of EDH7/EDZ7/EDU8 butterfly for 4 bps. That is, bought the nine month spread EDH7/EDZ7 for 16.0 (settled 15.5) and sold the nine month Z7/U8 at 12.0. (Fly settled 3.5). My initial thought is that 4 is too expensive, but a friend simply said it’s a Trump trade, figuring that infrastructure spending associated with Trump would widen the near spread more than the back. Given that sentiment I would simply favor buying the near spread.
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–With regard to the front end of the curve, I include the following table noting FOMC meetings in 2017, and the quarterly ED expiration dates. As can be seen, the EDH7 and EDU7 contracts expire just prior to the FOMC meetings, while the outcome of the June and Dec meetings will be known for EDM7 and EDZ7. I think there will be two hikes in 2017, either May or June and then again in Sept.
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FOMC ’17
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EURO$ QRTERLY
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EXPIRES
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FOMC
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1-Feb
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OUTCOME
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||
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15-Mar
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EDH7= 99.000
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13-Mar
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unknown
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3-May
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|||
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14-Jun
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EDM7= 98.945
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19-Jun
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known
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26-Jul
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|||
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20-Sep
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EDU7= 98.900
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18-Sep
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unknown
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1-Nov
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|||
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13-Dec
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EDZ7= 98.845
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18-Dec
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known
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—Below is a chart of 2/5/10 treasury butterfly. The range in 2016 has been extremely tight, -11 to +4. (Very similar to swap butterfly, shown to me by a client). Similar formation was made in 2012 when the range was more or less -60 to -45. The tight range in 2012 spilled over into 2013, and then exploded on the taper tantrum. Given increases in inflation measures and hints of ECB tapering, buying this fly at lower end of the range makes sense. In any case, the possibility of a break out one way or the other is likely increasing.
