Interest Rate Markets Increased Odds For October Fed Fund Rate Cut

Futures and volatility continue march higher
Futures have retraced between 50-60% of their recent pullback.
Option volume well over recent average daily volume, with floor volume outpacing screen
Interest Rates Report

Interest Rates Report

ED Futures and Options Market Recap: October 2, 2019
 

Futures were relatively quiet overnight, hovering around the day range lows. They then marched steadily higher over the day as talk turned to economic weakness both at home and abroad. Options volume, which averaged 1.5M contracts a day in September, was well above that as the markets increased the odds for an October rate cut.

 

Big Trades
 

EDZ9 97.75 puts, paying 1 on 60K (see note)

Nov (EDX9) 98.50 calls, paying 1.75 on 30K

EDX9/EDZ9 98.00 straddle spread, selling 20K at 4.5

EDZ9 80/81 put spread, selling 25K at 6

EDZ9 98.375/98.50.98.75 call tree, buying 1 leg, paying even for 20K

Short March (E0H, EDH1) 99.125 call vs Blue March (E3H, EDH3) 99.00 call, paying 0.25 for E0H, 20K

EDZ9 98.375/98.625 call spread 1x2, paying 0.5 on 20K

Short March (E0H, EDH1) 98.875/99.125/99.375 call fly, paying 3 on 25K

 

Things to Watch in Interest Rate Futures
 

#1 Two trades today were reloading from yesterday. The EDZ9 77 puts that were bought yesterday (paying 1-1.25 on 40K) showed a decrease in open interest of 16K. So, there may have been some covering (sold a while back vs 80/81 call spreads), but also these are new positions. Add another 60K today and it looks like this player is hedging some other position or perhaps a repo blowout. Also, the call 1x2 that traded 20K yesterday (98.375/98.625) saw another 20K bought today. These were new positions and this player is taking a more aggressive stance with regards to rate cuts, looking for 75 bps by the end of the year. Remember, EDZ9 is the only contract this year that expires AFTER the FOMC meeting (FOMC 12/11, EDZ9 expires 12/16).

#2 Prior to today’s action, there hasn’t been a lot of action in the midcurve options recently. So why is that? My first thought is that with the volatility we have seen lately, and susceptibility of the markets to the whims of the Trump twitter feed, there some real risk in those contracts. Add to the fact that most of the action, when they do trade, is in the deferred strikes (99.00), and you get the feeling that paper positioning is more hedging related as opposed to speculation. The result would be more aggressive defense of strikes, making the risk level for market makers even more intolerable.

#3 The CME Group put out some interesting numbers this morning with regards to September's action on interest rate futures and options. Several records were broken for average daily volume (ADV). Of interest, the SOFR futures traded 153K on 9/17 (The Great Repo Scare of 2019), which was a one-day record, and an ADV of 58K. As we enter into the fourth quarter, I would expect that overnight rates would continue to receive attention, especially with anticipated year-end funding issues we see every December. Add to that fact the impending launch of the SOFR options in January, and we may see those records broken again before the end of the year.

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