Three Days Of The Condor?
Big news in the EuroDollar futures market last week and Uncle ED don't lie...
Something which would seem to not be in the condors favor....
Still, why would somebody be placing such a huge bet counter to market expectations? It's either a huge hedge or something we Nattered about in August 2015....
Despite all the 2018 MSM parroting about the economy achieving critical escape velocity and inflation hysteria, we stuck to our guns and reiterated the above. Since Q4 2018 the bond market has called the central banks bluff, and they are now in the process of folding their hands, literally, figuratively and collectively.
Last week, the effective Fed Funds rate was 2.40 and reverse repo was 2.25%. IOER (interest on excess reserves) is set at 2.40 or 10bps below the upper bound of 2.50%.
On March 28th the 10yr 2.341 and IOER were at or below EFFR, the 7yr 2.233 was below RR, the 3yr 2.099 was yielding 354 bps LESS than the 30 day 2.453, and 16bps LESS than RR.
As of March 29th, only the 180 day note 2.443, 10yr 2.496 and 30 yr 2.890 are above effective Fed Funds rate 2.43, placing 30 and 90 day notes and all bond tenors from 1 to 7 yrs below EFFR.
Parking reserves, excess or otherwise at a risk free and unencumbered 2.40 would seem to be a nice proposition? If the Fed really wants to light this candle, as discussed in Charlatanism: Quantity vs Quality? in order to spur more Type 1 transactions vs Type 2, the Fed should NOT lower FF (Fed Funds) rates.
Instead, the Fed should decrease IOER (Interest on Excess Reserves) remuneration, while increasing repo and RR (reverse repo) rates. This would kick the banks out of the guaranteed parking (saving) arb, and back into the business of lending.
Irrespective of any FOMC action or non action, declining economic conditions coupled with liquidity issues should force risk premia up. At the end of the day, the whale holding the "condor" should make out like a bandit. $30 mill what do "they" know? Somehow one is reminded of this...
"There may be a new eurodollar whale in town. About $30 million has been plowed into an options bet that the market has gone too far in pricing in Federal Reserve cuts this year. The position has built up over the past week following the Fed’s dovish pivot, and is now likely the largest outstanding in its corner of the interest-rates market."When shorting [ED], the elephants are borrowing today (locking in at a lower rate) and betting on lower contract prices, meaning higher short term rates (rising) and higher dollar (rising) at the time of expiration. Interesting codicil... ED is an interest rate futures contract, which major banks utilize to hedge their deposit and loan balances. Moving West...
The structure is known as a eurodollar put option condor, and all it will take for it to turn a profit is for the central bank to remain on hold this year. The position also stands to benefit from any year-end funding squeezes." - A Huge Options Trade Is Betting Markets Are Wrong on Fed Cuts - BloombergThe Fed is on "hold" and has gone dovish due to declining economic conditions, so many anticipate a rate cut. Yet, this condor put is a $30 million bet on rising rates?
Something which would seem to not be in the condors favor....
"[starting in October 2019], the first $20 billion per month of any agency principal payments received will be reinvested in Treasury securities; any additional agency principal payments above $20 billion will be reinvested in agency MBS." - OPERATING POLICY March 20, 2019With the Fed buying, less supply, higher prices, lower yields? However, less turns into more for the "condor"... with declining long term monetary flows (proxy for inflation) the ED funding squeeze will be on with emphasis each quarter and especially year end. To evidence this one should watch the spikes in GC repo or risk premia around those periods.
Still, why would somebody be placing such a huge bet counter to market expectations? It's either a huge hedge or something we Nattered about in August 2015....
Hmm, the real professionals aren't buying into the media narrative? Perhaps they see some of the following? Contracting economic trajectory across the board, pointing to slowing economic conditions... [increased defaults] resulting in higher risk premia,.... [and a dollar squeeze] leading to potentially severe market liquidity issues." Contractions In Money Flows And Market Liquidity - Part 6IMHO, the market is more than likely wrong in pricing cuts, because the central bankers are drunk on their own "good times" narrative punch. The price of said intoxication is that any cuts would be tantamount to admitting policy failures. Further confirmation that, the recovery narrative since the GFC has been nothing but pure hyperbole, fostered by econometric falsity intended to anchor expectations.
Despite all the 2018 MSM parroting about the economy achieving critical escape velocity and inflation hysteria, we stuck to our guns and reiterated the above. Since Q4 2018 the bond market has called the central banks bluff, and they are now in the process of folding their hands, literally, figuratively and collectively.
Last week, the effective Fed Funds rate was 2.40 and reverse repo was 2.25%. IOER (interest on excess reserves) is set at 2.40 or 10bps below the upper bound of 2.50%.
On March 28th the 10yr 2.341 and IOER were at or below EFFR, the 7yr 2.233 was below RR, the 3yr 2.099 was yielding 354 bps LESS than the 30 day 2.453, and 16bps LESS than RR.
As of March 29th, only the 180 day note 2.443, 10yr 2.496 and 30 yr 2.890 are above effective Fed Funds rate 2.43, placing 30 and 90 day notes and all bond tenors from 1 to 7 yrs below EFFR.
Parking reserves, excess or otherwise at a risk free and unencumbered 2.40 would seem to be a nice proposition? If the Fed really wants to light this candle, as discussed in Charlatanism: Quantity vs Quality? in order to spur more Type 1 transactions vs Type 2, the Fed should NOT lower FF (Fed Funds) rates.
Instead, the Fed should decrease IOER (Interest on Excess Reserves) remuneration, while increasing repo and RR (reverse repo) rates. This would kick the banks out of the guaranteed parking (saving) arb, and back into the business of lending.
Irrespective of any FOMC action or non action, declining economic conditions coupled with liquidity issues should force risk premia up. At the end of the day, the whale holding the "condor" should make out like a bandit. $30 mill what do "they" know? Somehow one is reminded of this...
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