FOMC Countdown - 88% Chance of 25 Basis Point Cut and 11% No Change

Futures back and forth in relatively tight ranges
Volatility much lower on the day, led but front contracts
Lighter volume in options
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: September 11, 2019
 

A lackluster session with minimal overnight activity. Strong PPI numbers did little to move the market as futures made their ranges within a couple of hours of the equity open.
 

Big Trades
 

EDH0/EDM0 97.50/97.75 call spread stupids, paying 47.5 on 35K (see note)

EDZ9 97.875/98.125 call spread, selling 25K at 12

Blue Dec (E3Z, EDZ2) 98.00 puts, paying 2.5 vs 98.565 on 22K

 

Things to Watch in Interest Rate Futures
 

#1 Ouch! One big trade that went through was a painful cover of a short position. The EDH0/EDM0 97.50/97.75 call spread stupid was sold way back in April (sold 35K at 19.5, futures reference of 97.61 & 97.695, respectively). Why did they wait so long to cover them? Very odd, any way you slice it. Best guess is that it was put on against something else and they exited the position with a huge winner on the other side. At least I hope that’s the case, and not just taking a $24.5M loss!

#2 A rare blue mid curve trade today! Based on open interest, this looks like a new position. These don’t trade much right now based on where we are with rates and potential rate moves. The heyday for these contracts was when rates were 0-0.25, because there was no action to be had in the near expirations. In fact, the CME added Long Blue dated contracts, but those were just too far out for most. It is interesting that we haven’t been more active in these deferred mid curves. I would guess that it’s a good illustration of exactly how murky the rate outlook is 2 years out.

#3  We’ve retraced quite a bit in Eurodollar futures since last Wednesday when many expirations hit their contract highs.
 

https://ccm.quikstrike.net/ChartImages/BANTIXWFENLB02/FUTCHGHIS_000036.png?0bc5b5b5-64b4-4c5e-a6a3-c1eea4ff577e
Source: Quikstrike

 

For example, in EDM1 the at-the-money straddle was the 99.00 strike! During this move, we’ve seen a variety of trade types, such as opportunistic call buying, profit-taking in legacy positions and rolling down of short puts. The difference with previous retracements is that we are finally seeing some new downside positions being added. And with a looming FOMC decision, where a chance for a 50 bps hike has gone from 24.3% down to 2.8% according to Bloomberg, there’s still plenty of downside left if the Fed doesn’t deliver what the market expects.

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