Of euro$ vol and oil calendars
April 28, 2020
–On April 24, 2015, the Fed Effective was 13 bps with a 0-25 target, just like now. The Fed had not yet begun to raise rates. EDM15 was 9969.5, EDU15 9957.5, not all that far from yesterday’s M20 at 9960.5 U20 9967.5. With essentially the same amount of time until expiration, the June straddle was 6.5 vs yesterday’s 11.5 and Sept was 14.5 vs yesterday’s 15.5. From there, the story deviates quite a bit. In the past couple of days, eurodollar premium has been crushed. Let’s go back to 2015 for a second. The first red was EDM16 at 9907.0 and the first green was EDM17 at 9842.0. The curve was MUCH steeper as the market expected eventual tightening. Yesterday, the first red is EDM21 which settled 9972 and the EDM22 contract settled 9965.0. FLAT. In 2015, the red June 9912^ was 49.5 and the long green 9837.5^ was 98.5. Yesterday, EDM21 9975^ was hammered down to 19.5 from 23 on Friday and EDM22 9962.5^ to 40.5 from 44.0 on Friday. It’s true that back month yield levels are much lower so straddles SHOULD also be lower. But 19.5 in red June vs 49.5? The BOJ said they would keep the 10y JGB around 0 and there’s chatter of the Fed engaging in YCC (yield curve control). But these straddle levels suggest the eurodollar market is wearing cement shoes at the bottom of the Chicago River. DEAD. Going the way of Japan. No hope. Disclaimer: I did not go back to look for the time when the first red straddle was the cheapest ever. I just looked at a couple of examples. In the middle of 2017 we had straddle levels a bit more consistent with today’s. For example, the first red with 418 days to go was the 9837.5 strike at just 32 bps. (there are 413 dte now). My only point is that these levels suggest a black hole.
–Articles abound this morning about oil. Earlier this morning a snapshot on CME site had CLM0 11.46, -132 and CLZ0 28.02 +56. That’s a spread of 16.46. Actual spread as of this writing is -16.25/-16.22 with CLZ0 +80 cents at 28.26 with volume of over 22k. It’s not a fake price. So near oil reflects the same thing as near eurodollars. Cement. But back oil is telegraphing a somewhat different outcome than back dollars.
–How about the yield curve? Not that it matters much any more but it did steepen slightly with 2’s up 1.2 bps, tens +6.3 to 65.4 and thirties +8.0 to 125.1. Implied vol in treasuries, like dollars, also slumped. TYM0 138.5 straddle settled 1’22 or 4.6. 7 year auction today.
–The Fed yesterday announced it is making credit available to smaller municipalities. In related news, Illinois State Representative Darren Bailey of Xenia (population 364) won a restraining order against Gov Pritzker’s stay at home dictum. I hope Xenia gets a bit of Fed funding. But they probably aren’t asking for it. And my guess is they’ll be fine either way.
