How things can change in a week!  A number of the things I mentioned last week are starting to normalize.  Apparently, I don’t live in Bizzaro World after all!

  • The libor fixing stabilized. It’s only been a few days, but libor looks to be stable around here.  As per the chart I showed last week in the Trade Thoughts section, I do think we could get more EDM-FF narrowing as the year goes on, than is currently priced by EDM8-FF.  This makes owning EDM8-based call structures attractive, as both a libor play and a crisis play.  The other thing we should think about is whether the factors affecting libor the past month are seasonal.  I’m pretty sure the Treasury is going to have to borrow a lot more money before April 15th 2019, than they did this year: higher interest rates, a revenue projection shortfall, a massive budget deficit, Fed tapering, etc.  We should look for ways to play for this for next year.
  • The non-quarterly meetings drifted lower last week. Imagine that!  The May and August meetings each dropped 1.5bps on the week.  It seems implausible someone could have thought that Powell would announce a press conference after every meeting at last week’s Congressional testimony.  But it seems otherwise strange that the nonquarterly meetings corrected last week of all weeks.  In any event, the Fed is going to be GRADUAL.  It is highly unlikely the Fed will hike in consecutive meetings, so that alone is going to make a May or August hikes difficult with March and June so aggressively priced.
  • The H2 2018 hikes rose 3bps last week. It really made no sense that these were so low, given the rest of the curve.  We normalized some.  At this point, it’s hard to say what happens to equities and the trade tariffs.  But the H2 2018 meetings look less depressed now.
  • Trade tariffs are a big question mark. The thing to understand about the Donald is that this is what he does… the Art of the Deal.  You start off saying something absurd, and get something less absurd as a concession.  That’s what negotiators do.  We need to take everything he says with a grain of salt.  The main issue could be what happens to equities (and corporate planning) in the crossfire.  I’m no trade expert, so this makes forming a strong opinion on the direction of the economy more challenging.  Of course, this is stopping Kong…
  • King Kong increased his position. The EDZ9 open interest increased another 127K last week.  But this buying was not enough to keep the curve distorted, as the EDM9-Z9-M0 fly was 0.5bps lower on the week (and the EDM8-Z8-M9 fly was up 3bps on the week).  The BOJ’s hawkishness helped steepen the longer end of the curve, which helped the EDM9 6mo fly.  But as mentioned last week, trying to keep the EDM9-Z9-M0 fly elevated is like swimming upstream – Kong has to put a lot of work into just staying in place.  I do think he may try something around this month’s Fed meeting – like jam the curve after the Fed meeting, so let’s go in light and look for opportunities there.