Sept 28. 5/30 chart US Japan Germany
–Tuesday’s session began with new lows in DB and associated risks to global equities, but ended with a slight rise in DB, which has further firmed this morning as the CEO says that capital injections aren’t needed. Euro was marginally lower. Large mover was crude oil, down 140 late as attention now shifts to the November OPEC meeting for possible production cuts.
–The trade mentioned yesterday morning (+27k week 5 TY 131.5c expiring on Friday), was exited yesterday, contributing to a softening of vol. I marked USZ bond vol at 9.9. (more below)
–The ED curve flattened with red/gold pack spread closing at 40.5 (-2.375) and approaching recent the recent low of 38. The front end of the curve was interesting, with weakness in EDZ6 as thoughts of funding pressures emerged, due to weak bank stocks. There was a buyer of 75k EDZ 9887.5p for 0.75, looked to be a cover but not much change in open interest. EDZ6 has huge outstanding positions, with 1.58m in the EDZ6 contract itself (the most of any ED), and 900k 9900p, 815k 9887.5p. There was a large buyer of EDH7 in the early part of the day, apparently a short cover with OI -18k.
–2/10 treasury spread also under pressure (in part due to new 2 yr) closing at 81.4. 5/30 spread fell as well, to 116, down slightly over 4 bps on the day. However, it’s well off the low of 104 set earlier this month. As the attached chart shows, 5/30 in Japan bottomed at the end of June and has rallied since. In Germany, the low was a month later at the end of July around 86, now at 102, and the US was the last to bottom at the end of August. Perhaps these curves didn’t actually “bottom” but are just bouncing…the low level of USZ vol under 10% would suggest that interpretation. However, given the change in BoJ policy, it certainly seems worth the tactical risk to be long US bond vol.
–Both Yellen and Draghi speak today, the former in front of the House Fin Services Committee, on regulation.
