Why Are Interest Rates Overreacting to Negative Economic and Geopolitical News?

Low volume overnight following holiday weekend
Floor volume almost 4 times screen volume
EDU0 and back are on contract highs
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: September 3, 2019

A quiet overnight session was disrupted by a weak ISM number, which moved futures swiftly higher. Specifically, the employment component was the weakest reading since 2016. The trend continued with volatility moving higher with futures and market players continued focus on upside structures.

 

Big Trades
 

EDH0 99.25/99.50 call 2x3, paying 2.5 on 10K (see note)

EDU9 97.875/98.00 put spread 1x4 vs 98.125 call (2x), selling the 80 put and 81 call for 4.5, 25K

Feb (EDG0) 98.75/99.125/99.50 call fly, paying 4.25 on 20K (see note)

 

Things to Watch in Interest Rate Futures
 

#1 As stated previously, the Eurodollar market, and interest rates overall, continue to have outsized reactions to negative economic news or geopolitical developments. Today’s ISM numbers moved us from session lows to session highs very quickly. But what if that number had been good? It’s becoming hard to visualize a scenario that could break us that quickly. Perhaps an ironclad trade deal? Not sure, but it’s worth noting that most players are positioned for the upside, long calls and call structures vs short puts. If we do get any real push lower, it would be chaotic.

 

#2  More ratioed call spreads, this time in the EDH0 expiration. It’s interesting what is being done to the vol curve at those strikes. The call slope begins to flatten out and then turns down around the 99.50-99.625 strikes. I first noticed this last week when we had an EDH1/EDM1EDU1 99.25/99.375/99.50/99.625 call condor strip being sold at 1 tick. One tick for all three call condors! After further analysis, it was obvious that the 99.625 strike was cheap. The question becomes if we see a pullback in futures, for whatever reason, how quickly does the call slope adjust? Talk about a rock and a hard place, short puts and short call slope would not be an enviable position! 

https://ccm.quikstrike.net/ChartImages/BANTIXWFENLB02/VSC_000025.png?03e84d29-2df8-415b-84ad-236b85c85ec4
Source: Quikstrike

 

#3 Today was the first action in the new Feb contract (EDG0). Recall that we saw a lot of January (EDF0) action last week. The EDF0 doesn’t get you much extra over the Dec contract, but the EDG0 does get you one more FOMC meeting. It will be interesting to see if this continues.

About the Author

Albert Marquez works for Chicago Capital Markets (CCM) and covers Eurodollar & Treasury Options and Futures. Albert can be reached  on Twitter @STIR_Report or amarquez@ccmmarkets.com