We had a noticeable shift about how the quarterly vs non-quarterly meetings are priced. I mentioned in an email last week that there was a large increase in open interest in FFX7. Since then, there has been a larger increase in OI. Open interest in FFX7 increased over 250% the past week, from 10.0K to 35.4K contacts. The other FF contracts had no notable OI change (other than FFF8 which has no meetings in it). I was speculating this was some kind of “September FOMC” deferral trade, since it is unusual for someone to want to take a large position in a less liquid contract otherwise. My best guess is that a large market participant is playing for the September meeting to get priced out and moved into November. The other possibilities are fading the Dec meeting (vs EDZ7) and/or combining a ED-FF spread narrowing view.
Idle speculation aside, the interesting repercussion is that most of the non-quarterly meetings have started getting noticeably priced in. Compare the Fed meeting pricings from this past Friday, with the last Fed meeting summary I published just 5 weeks ago. There are a number of interesting things that have happened:
- These 12 meetings (18 months) sold off an additional 17.4 bps in the last 5 weeks. However, the quarterly meetings only increased 6.8 bps, while the non-quarterly meetings (not including Feb 2017, which is mostly dead) increased 11.3 bps.
- The non-quarterly meetings went from being 20.6% of a quarterly meeting to being 41.5% of a quarterly meeting (not including Feb and March 2017). In retrospect, I suppose a month ago the non-quarterly meetings were very low. I had been mentally using an estimate of 33% being closer to “fair” for the proportion of non-quarterly to quarterly meetings. This rough estimate obviously depends on the particular meeting. Since I think 33% is closer to fair, I’m looking for good reward/risk ways to fade some of the non-quarterly meetings – especially for Article 50 and the potentially weaker post-holiday economic data tail we may get later this quarter.
- The November 2017 meeting is the highest priced non-quarterly meeting. Recently, I had discussed in various Trade Updates why fading July 2017, Nov 2017 and Jan 2018 made sense. But it seems a little suspicious that a larger player may want to take a large position to play for this meeting. I don’t think it could be the German elections. But I can’t think of anything else right now on the calendar. However, we may be able to do something less directly, that I will discuss in a future Trade.
- I had previously discussed fading the July 2017 meeting. But from the current level, it may pay to be patient – especially since the November meeting is 1.3bps higher.
- The Jan 2018 meeting also looks like a good sell, and this is part of a new trade on the Trade List. The Fed is less likely to go if they hike in December (the highest probability meeting on the curve), and this could be Yellen’s last meeting as Fed Chair. A lame duck meeting with no press conference does not scream “hike” to me. And we could get a cheap look at a crisis scenario.
- The March 2017 meeting got a noticeable upgrade. This had been lower for some time because the Fed was seen as “gradual” and because of Article 50. But the data has been noticeably stronger. I don’t have a strong view on this meeting, and I generally don’t want to touch a meeting where I can lose over 17bps to make less than 8bps. However, it is interesting to note that the March meeting is not that different from the 2018 quarterly meetings, the latter of which I like much better from a reward:risk persepective.
- If you had a strong view on a quarterly meeting, it is relatively cheap. Higher non-quarterly pricing means that for a given level of rates, the quarterly meetings are lower.
- My favorite way to get bearish rates is still 2018 meetings. I’ll look at various ways to buy on dips. The quarterly meetings still offer reasonable odds… especially vs some spreads in the fronts. On the selloff the past month, the spreads in the reds have lagged, and there may be value here. Stay tuned for a new relative value Trade idea.
Our friend sitting on FFX does not seem to want to go away, and this could keep the other non-quarterlies bid. I don’t think we have to be in a rush to get some of the non-quarterly trades on. So let’s see how the markets evolve next week. In the meantime, here are some trades to consider: