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Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
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I was a little surprised that Eurodollars didn't rally a little further than they did. Since September the Z22 Eurodollar has lost almost 70 basis points in price form 99.6 to 98.92 (meaning rate expectations have increased form 0.4% to 1.08%). If this Omicron variant is a real threat then I would think that rate expectations for Z22 could easily be the same as they were 3 months ago. US economy is on fire, but its on fire because everybody has shrugged Covid off and doesn't care anymore. If that changes I suspect the economy will cool quickly.
Like a lot of these violent moves on a Friday, I suspect there will be additional follow through on Monday after people digest the information (of both the news and the market moves) over the weekend.
A few countries have shut down or limited international travel, and Powell of course mentioned Omicron as a risk, but for the most part I think people are generally not too concerned. Consensus so far suggests that people think it's possibly milder than delta, that vaccines and treatments will be just as effective, and that it really doesn't change the big picture outlook very much.
But if public opinion quickly reversed, bond and currency markets have not. Which suggests to me that Omicron headlines were merely a catalyst for something that was more positioning related than fundamental.
Anyway today is month end, so last chance for offsides money managers to get their funds in line before the reports go out. I'll most likely sell the close and look for a retracement in the first few days of December, as the accounts who were forced to cover step aside for a bit and the market braces for coming supply.
I was just looking at the Eurodollar futures curve when something hit me. The curve is not indicative of one projected path of interest rates. Rather, it's indicative of a binary outcome. Bear with me for a moment.
First, look at the entirety of the curve, starting with front months at 99.80, or an implied yield of 0.2% for a few more months until we get through the taper, at which point hikes slowly start getting priced in.
The Jun '22 contract, at 99.52, implies at least one full quarter-point hike by expiration. The Sep. 22s at 99.29 imply probably one more hike by then. The curve continues on this path until it plateaus after Dec. 23 at an implied "terminal" rate somewhere in the 1.60-1.65 area. Basically 1.25 to 1.50% worth of rate hikes before they're done. A few of the back months even invert, suggesting potential for rate cuts beyond.
Is this what the market is telling us the consensus actually believes? I don't think so. Not at all. In fact, I think it tells a story of two possible, highly divergent outcomes.
We obviously have a bit more visibility in the nearer term than we do further out, so taking Powell at his word gives us a timeline consistent with what we're seeing priced in for 2022. But beyond that, any of a number of things could happen.
Either the recovery / growth cycle continues, inflation remains above the Fed's comfort zone, and they are forced to tighten more aggressively than they currently expect to, eventually raising overnight rates to well above 2% or even 3%...
Or, the economy and / or markets just puke, and the Fed never even makes it to their first hike.
These M23s at 99.60 aren't telling us that rates will be 1.40% in June, 2023, they're telling us that rates will either be 3% or zero in June, 2023.
Today was kind of interesting, as twos, threes, fives, tens, and even ultra 10s absorbed an awful lot of sells (bids getting hit) but ended slightly firmer.
Some people might suggest that the selling was probably just hedging activity in front of this week's auctions (2s today, 5s tomorrow, and 7s Wednesday), but regardless of the explanation, it may be informative to see how the market trades through the next few days' supply (I emphasize "may", as I'm still not sure I'll learn anything).
For what it's worth, historical precedent suggests that coming out of the last auction long and holding through year-end works more often than it doesn't, so I'll be biased long anyway, but if anyone has any thoughts I'd love to hear them.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
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Posts: 5,049 since Dec 2013
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Yes the mean of a bi-modal distribution can be the same as a uni-modal distribution but the distributions can be completely different.
You can actually plot the implied distribution by looking at the options. One of the easiest ways to do this is to look at the call butterflies. This is what you get if you look at the Eurodollar Z3 Call Butterflies for COB 27-Dec. I plot both the 25 point and 50 point flys. As you can see, while not bimodal, the distribution is extremely left tailed
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,049 since Dec 2013
Thanks Given: 4,386
Thanks Received: 10,206
Interesting email from the CME. While LIBOR (which Eurodollars references) doesn't actually go away until 2023 I believe, I believe guidance (US regulations even?) restricted new transactions referencing LIBOR starting Dec 31st 2021 I believe. So this surge could be explained by that.
Through nine trading days in 2022:
SOFR futures OI has risen to a record 2.27M contracts – 20% of Eurodollars.
SOFR futures ADV has jumped to 531K contracts – 26% of Eurodollars.
SOFR futures volume hit a record 784K contracts on Jan. 11.
SOFR futures volume reached a record 35% of Eurodollars on Jan. 12.
SOFR options are trading daily with streaming quotes and market makers responding to RFQs (similar to Eurodollars) via open outcry, Globex, and blocks.
SOFR swaps have captured 45% of CME Group's USD swap trades, up from 35% in December, 32% in November, and just 7% in July.
If your still unclear on what SOFR is I would recommend
There's been a lot of talk about the recent widening of Eurodollars against SOFR. Some funding stress out there. Also a huge bid for vol.
(chart grabbed from Alex Manzara's weekend comment at chartpoint.com - an excellent resource, I might add...)
Auctions of 3s, 10s, and bonds this week, FOMC next week.
I have to think there's been some short-covering, or at least some hedging of short positions via calls (hence the spike in vol) but I don't think positions have been cleaned up yet. Supply and next week's expected rate hike should give shorts a bit of breathing room but I think the market ultimately finds a pretty firm bid well north óf the feb lows...
