Rate hike chance moves up
June 18. 2021
–Spectacular moves in many markets yesterday as players try to digest Powell’s upbeat economic summary and more hawkish outlook for monetary policy. (I think “players” may be a more appropriate word than “investors” for this type of volatility). Interest rate curves were one of the most visible reflections of changing positions, where 5/30 fell another 9.8 bps yesterday to a recent low of 122; down 19 in two days. Commodities and precious metals hit hard, USD bid, curves crushed like falling timber. In some ways, the curve moves represent a mini-taper-tantrum. On the eurodollar strip, prospects for tightening were jolted forward. As an example, I have attached a chart of the EDU2/EDU3/EDU4 butterfly (thanks DK). Yesterday, EDU2/EDU3 one-year calendar ROSE 4 bps to 63.0, while EDU3/EDU4 FELL 7.5 bps to a new recent low of 50.5. The fly rose 11.5 on the day to 12.5. As is evident on the chart, a swing from -13 to +13 in a month is rather unusual. I suppose these wild moves are partially explained by all the loose money sloshing around, as reflected by the RRP operation which totaled a record $756 billion as the rate was raised to 5 bps. Today’s equity option expiration could also drive some volatile trades, and Powell is slated to further explain the Fed’s thinking in front of Congress on Tuesday, as we approach quarter end.
–The peak one-year eurodollar calendar is now EDH23/EDH24 at 64.5, but the nearer spreads are catching up as an actual hike could move forward and news sources report that many on the Fed are getting restless with the new framework. What has appeared to be stability has been orchestrated by relentless Fed stimulus– even a change at the margin can have unintended consequences. After the Fed there were two large block buys, 20k each EDU2/U4 and EDZ2/Z4 at 121.5 and 118. Yesterday these settled 113.5 and 109.5, but there was another 20k block selling EDU3 and buying EDZ4, so perhaps rolling the short EDZ4 leg forward to U23.
–I’m not sure how much to trust (or interpret) the prelim open interest figures, but the big changes were in EDH23, down 45.7k contracts (ending price 9942, -4.5), EDZ23 down 49.3k contracts (ending price 9890, -4.0) and EDZ25 down 38.5k contracts (ending price 9816.5, UP 12 bps). The guy with the long EDZ23/EDZ25 spread did NOT have a good day. On the EDZ25 contract, the decline in open interest represented nearly 19% of total positions. I guess we can roughly say that every 10k exit of a green/gold calendar can move the spread around 4 bps. Follow the science, right?
