Curve Advisor Bulletin
The trading implication of this is the price action you see this morning – a selloff led by EDU9, with flattening further out (the Recessioners thinking the Fed is wrong and will have to ease more later), and a steepening in the longer end. I would expect this to continue, since the markets apparently believe that with the yield curve inversion, recession will come in the next 12 months. Obviously, the best value trade is to still be short the FFG0 3mo fly and FFJ0 3mo fly (you knew it was coming) or similar trade. The move has been slow, but I think that should break some time in the next few months.
It occurred to me yesterday that Bullard not having made up his mind and Kashkari “leaning” towards an ease means that a Sept skip is indeed “possible”, as I have claimed the other day. I’m sure if you made them choose, they would both vote for an ease. But the fact that the two most dovish members on the FOMC haven’t firmly decided on ANY ease already makes me think that a 50bp move is less likely than a skip at the September meeting aotbe. A lot can change in the next month (Jackson Hole, Sept 1 trade deadline, ECB meeting, stocks breaking support, etc). But I think the FFV9/EDU9 gorilla is going to get stuffed (again) if he continues to price in 30+bps for the next meeting. His persistence could be amazing for those EDU9 straddles I liked shorting.
These are volatile times. But it occurs to me that what is not as volatile is what happens at the Sept meeting. I’m not saying that the Fed couldn’t skip, or the Fed ease 75+bps. But I think we could just sit between 30-40bps of ease in August for some time (currently 35bps). Granted, we have Jackson Hole, the Sept 1 trade deadline and more data. But I was looking at the EDU9 98.00 straddles (16) and was thinking that if you thought that the only possible outcomes were 25 and 50bps, that it’s +EV (positive expected value) to sell the straddle. This is because the EDU9 options expires before the Sept meeting. So I would think (assuming only 25 and 50 are possible) that the Sept meeting will be 30-45bps priced. If you make that assumption (that we will be 5bps off of actual – that we will be between 30 and 45 bps), you can have a ~20% probability of a 0 or 75 and still have selling the straddle break even on an expected value basis, assuming Libor-FF and the Nov meeting pricing behaves. If you have tail protection in your book, see if being short a small amount of the straddle makes sense for your book. We could just decay going into any of the previously mentioned “turning points,” and you can reduce/unwind as necessary.
We’ve had a few numbers recently that the markets have been freaking out about:
• USDCNY above 7. I think this was important mainly as an indicator of whether China was going to weaponize the yuan to offset tariffs (aka a signal of an escalating trade war). But when all the other exporting countries are trying to devalue their currencies, I’m not sure the move above 7 is particularly meaningful. The markets will be looking at the future trajectory, but I think you also need to factor in what the other currencies are doing (relatively).
• UST 30yr below 2.0%. This is to be expected when the global economy has been so weak and the US has relatively higher rates than the rest of the world. We had seen 30yr reasonably close to the Fed longer run neutral rate. But in the current environment, having the 30yr 50+bps below the FF target seems reasonable. Consider that the 30 year bund is at -21bps. Having a US-EU spread of 220bps is actually in the middle of the recent historical range.
• UST 2s/10s below 0. The markets are freaking out, as this has in the past been a reliable recession indicator in the past. As Yellen said yesterday, “Historically, [yield curve inversion] has been a pretty good signal of recession, and I think that’s when markets pay attention to it, but I would really urge that on this occasion it may be a less good signal. The reason for that is there are a number of factors other than market expectations about the future path of interest rates that are pushing down long-term yields.” For reasons previously mentioned, I’m not sure the inversion is as meaningful in this global backdrop.

This gets me to the million dollar question, which is “what is the Fed reaction function?” Bullard (formerly uber-dove) said last week that it was premature to decide on an action for September. He may have been swayed this week… or not. But it seems to me that the markets are all on the same bandwagon, based on the meaningless numbers above. Granted, it all depends on how the trade talks develop and how equities hold up. But the data has been better, and it’s not clear to me the Fed will be that aggressive, despite Trump and the gorilla.

I saw this funny cartoon on Twitter, and it pretty much fit my “dragon doesn’t bow to a monkey” theme. Yesterday’s turnaround was an interesting development in the trade talks.
• That was a Trump bluff that didn’t work out. I’ll give him the benefit of the doubt and assume that was a “probing bet.” So he should know that China isn’t afraid of tariffs. In my mind, this reduces the probability of the “25% tariffs on all” scenario as a negotiation tactic (what would be the point, if China doesn’t care?), unless he just wants to be spiteful.
• The weaker China and Hong Kong disruptions could make China more amenable to a deal, aotbe. Plummeting equities could make the US more amenable to a deal, aotbe.
As you know, I had been dubious about a “good” deal getting done. However, the markets seem to be even more pessimistic than I am. So I suppose this makes me an optimist, relatively.
In terms of trade themes mentioned yesterday,
• GE2Z1 99.00 calls vs selling GE4Z3 98.875 calls traded -0.5. -1s may be tradeable. My newfound steepening bias makes more sense on a “large” ease. .
• I like the idea of owning the EDV9 98.00-97.875 put 1x2 (traded 1s). You need to have Libor-FF blowout protection (say the short EDH0-FF I suggested). This is probably only a “C” trade, but I do think fading this rally makes sense – especially if the China phone talks appear to go well.
2s/10s are at 0! I think it's worth taking a stab at something like buying EDU2-U3 spread (3.5/4), and scaling in. The reasons are: (1) the roll forwards and backwards are attractive, (2) we reached a measured move target in 2s/10s (it traded between 15 and 30 and now it is at 0), (3) there probably is some panic (and stops) in the markets based on recent news, (4) usually the curve steepens back at some point, (5) even in the EU, the curve remains steep, and (6) if things get really bad, the Fed will be aggressive in the short end.
The combination of the higher CPI and better China data makes me think it is *possible* the Fed may not ease at the next meeting. We still would need a solid Retail Sales and Employment Report for this scenario to be a “maybe.” But I think the markets may be complacent in thinking we *definitely* get an ease. The issue with buying EDU9 puts is that the gorilla may keep the Sept meeting substantially priced (and the EDU9 options settle before the Fed meeting). The EDV9 puts are not as clean, since it contains the Oct, Dec and half Jan meetings. Let’s keep an eye on it - I don't see the gorilla going away when the world could be falling apart.

The other trade theme I mentioned is for conditional bull steepeners. I think something like buying GE2Z1 99.00 calls vs selling GE4Z3 98.875 calls (green midcurve vs gold midcurve) for 0 makes sense. I would think if we started pricing in another ease and a half, the curve could start steepening.
I knew the curve steepener was the wrong trade! US 2s/10s flattened today to 6bps, making new cycle lows. It’s a little unclear how much more we flatten – I would guess we could find some support as we get closer to zero. The steepener fans would need much more aggressive eases priced in for the curve to steepen noticeably in this environment of negative rates. I think buying GE2 midcurve calls vs GE4 midcurve OTM calls could make sense (playing for “zero” rates) if the curve flattens further as an upside tail play. I’ll keep an eye on attractive structures.

I still think there is too much priced into the Sept meeting, but there isn’t a great way to play that, with EDU9-FF pricing in 4bps of widening. It’s possible that the aggressive eases priced into the curve was because of too many people in steepeners, so we may see a reprice of the near-term meetings. This is something else I’ll look for.

With CPI and Retail Sales coming up all the wild headlines globally (Brexit, Argentina, Italy, Hong Kong, etc), the curve is going to remain choppy. Let’s see if we get any good opportunities.
Meh. More headline noise: Trump says we may not have face-to-face talks next month and then walks back some of the Huawei ban. And it feels like we could get large moves on the nightly CNY fix. This is what I mean about directional trading being challenging. With all the curve volatility now, I think it’s a good time to flip double fly structures in the US:

As I watch the belly of the curve lead the selloff, I am thinking that buying any kind of double fly further out the curve makes sense in both a reflation selloff and a bull steepening. It’s a little weird to get this type of trade that rolls positively. I mentioned the double flies around EDM2 12mo double fly yesterday. An alternative version is to buy 6mo “double” flies like buying EDZ2 6mo fly vs selling EDZ3 6mo fly (you can execute as fly to fly or buy EDZ2-Z4 spread vs sell 2x EDM3-M4 spread). You can also look at the version starting in EDU2.

CHART (double fly):
I was going to look at the FF probabilities, but the markets have moved. I’ll do this on a quieter day. I have a few cautionary comments regarding trades:
• If you are going to sell some of the positive flies and double flies centered around the greens, just be aware that typically in a deep easing cycle, the markets will start pricing in hikes further out the curve (which could cause flies further out the curve to go higher). This effect should be more muted than in the past because of global central bank policy, negative rates the lack of inflation and the potential for forward guidance. However, you may want to be long the EDM2 12 month single or double fly (or similar) as reflation protection. This structure rolls positively and should offer some protection against the fly curve going positive. In fact, if another ease or two are "certain," being long these structures outright could make sense. See Charts (ED12 12mo single and double fly).
• I would be wary of being long white futures or calls vs FFs (except for maybe long EDU9-FF, which rolls positively - but have some offsetting short ED-FF further out the curve). When the markets could get nervous, I’d rather be long FFs than EDs. There is always the tail risk that Libor could blow out and/or the Fed add liquidity via the FFER. Brexit and year-end are coming!
• Did I mention that I like selling FFG0 3mo fly on a pop? Look at variations (selling FFG0-J0 or FFG0-K0 vs buying meeting-weighted EDH0-M0 or EDH0-U0) on pops get some of this risk on. This has strangely bee stubborn, but I see any pops as a good sell. Have a core position and a little to flip.

There’s a Bloomberg article stating that China may be stabilizing the yuan (based on the overnight fixing). This could obviously change any day. But for now, let’s suppose the currency war will not escalate. I see no benefit to the US escalating, as it is clear from recent examples that the Chinese (and other countries) are more willing to manipulate currencies (oh, I mean central bank rates) than the Fed is. It’s remotely possible the Fed could have a change of heart, but most of the members have been known to live in Ivory Towers, so it’s hard to imagine they would want to get into the street fight of currency manipulation. In the meantime, the Chinese have conveniently depreciated their currency by 5% since earlier in the year, nullifying some of the direct impact of tariffs, and sending a signal to the US. It should be apparent to the US that the Chinese can easily offset any impact of tariffs. #playingchesswhileweplaycheckers.

Let’s say the tariffs go into place and China retaliates in some way. I think this is a 80+% (joint) probability. We will have no data that will capture this turn of events by the time of the September FOMC meeting. While Powell may be dovish, I can’t see the two dissenters seeing the need for yet another rate cut, and it’s not clear the rest of the FOMC will want more than a 25bp cut with no data (barring some equity collapse). I’m not even 100% convinced the Fed will cut next meeting!

Getting back to the trade tariffs, I think Q4 and Q1 ease plays may be better than playing for a 50bp Sept move. The reasons are: (1) we’ll have more time to ascertain the effects of the Sept 1 tariffs and countermeasures, (2) we have the Brexit deadline on October 31, (3) we have the “historical” fall equity crash periods coming up, and (4) I always feel like anything bad could get magnified over the holidays (ie poor consumer confidence could get magnified though lower holiday spending). We have potential Libor-FF widening over year-end, so I probably prefer FF “longs” (via spreads and flies) and some kind of ED shorts (either via futures or options), unless we have an exaggerated widening priced. The other reason I lean towards ED-FF widening is in case we get a credit blow-out at a time of market stress. So let’s look for opportunities around these views.
The reason for the caution is that we now have three potentially large headlines: (1) trade war, (2) currency war, and (3) liquidity issues. So we could get unwanted volatility at any time. Normally, volatility could be good for certain positioning. But the rate regime could change on the news, so we don’t have a rate backdrop to lean on.
I’m finally back in the office, but I’m at a bit of a loss as to what to make of the markets. I think my previous message from last Friday still makes sense: “I think when the next 10bps could be based on “nothing,” staying conservative makes sense, without a strong view.” Those trades I mentioned also have started moving a little, but I think something like the FFG0 3mo fly should move a lot more. I mean it rolls 12bps in your favor forwards, and 1.5bps in your favor backwards. I’m not so sure next March and May are poorer candidates for an ease as any other meeting.
I mentioned liking short flies centered around the back whites and reds earlier in the week. Considering we now also have the specter of additional China tariffs and the data holding up reasonably well in the short term, cheap plays for deferred eases makes sense. At the risk of sounding like the perpetually broken record, I like:
* being short the FF flies (FFG0 3mo fly, FFJ0 3mo fly on a pop, FFF0 3mo fly on a pop, etc)
* being short EDH1 3mo fly, EDH1 6mo double fly
* being short EDU1 12 mo fly vs 1.5-2x EDM2 12 mo fly or EDU2 12 mo fly
They have been trading in a tight range, but have enough movement to flip, and the larger tail is probably towards the flies to go lower in the current environment. The latter two bullets are playing more for forward guidance or a prolonged period of stagnation, rather than eases.
It’s hard to have a strong view when we are so headline-dependent. We had the large Trump-related surge yesterday (on top of the weak economic data), and we seem to be coming off those highs on rumored reports that the tariffs may be pulled back if there is more progress, and rallying on Kudlow saying he knows nothing about the potential of tariffs being pulled back. This is what I mean. Unfortunately, threats are not how you get the Chinese to make progress. I think when the next 10bps could be based on “nothing,” staying conservative makes sense, without a strong view.
This is pure conjecture on my part, but considering FFQ9 OI declined 114K the past two days, and EDU9 OI declined 44K the past two days, I think the gorilla my have been long FFQ9 and short EDU9 (futures or options delta)… probably as a “cheap” play for a 50 and done. Unfortunately, that trade would have gotten smoked on the Fed meeting and the tweet yesterday. I think this may be why EDU9 continues to be strangely well-bid. I suppose this could be just a play on the economy falling apart soon after the Sept 1 tariffs take effect. Let’s see if the EDU9 OI increases or decreases tomorrow.
In the back of my mind, I’m starting to wonder if Powell is bi-polar. He seems like a reasonable guy, so I am going to attempt to explain away his varying rhetoric by saying that when he speaks outside of Fed meetings (including Congressional testimonies), he is speaking for himself (as a dove), and when he speaks after Fed meetings, he is trying to represent the group. Or he may just be very sensitive to changes in data. I’ll need to mull this over a few days, while we await some major data.

I have a few market thoughts:
• How much did the FFQ9 gorilla unwind? FFQ9 did seem a little better offered, even after the FOMC.
• Will the FFQ9 gorilla be the FFV9 gorilla? Because if you thought the Fed didn’t want to disappoint markets, why not? But if I were him, I would wait until after payrolls.
• And… that’s why I hated 2s-10s steepeners. It just seemed like everyone was in it. It was never a cheap bullish trade – it was just a catastrophic bullish trade that was going to get smoked on a non-dovish Fed.
• But I do think with Brexit approaching, we could get a curvature move centered around the reds (flies centered in the back whites and reds could go lower). I’ll take a look at some structures later this week, around the data releases.
We have less than an hour to showtime. The most likely scenario is clearly a 25bp ease. What will be more important is the tone of the press conference. On a 25bp ease, look for:
• I think EDU9 will gravitate towards either the 97.875 or 98.00 strike, depending on how bearish/bullish the Fed sounds. I think one of those strikes could start getting pinned.
• I still like selling high flies centered around the first half of 2020 – especially on a pop. On slight bearishness or bullishness, the markets will price in later eases.
On a 0bp move, I would look for deferred ease trades, as the markets will think the Fed will have to ease (more) later. On a 50bp move, it will be interesting to see if the Fed is hawkish or dovish, because their intent could be as a one-and-done or a signal of serious concern. My next turning point focus will probably be on Brexit, and the inevitable “fall equity crash” narrative that will take hold. But let’s see if Powell has anything interesting to say first.
Now that I’ve had some time to reflect, here are some thoughts I have on the markets:
• The markets seem to be divided regarding whether we are headed towards recession. I think a recession is primarily dependent on whether or not we get a China trade deal. I realize we will have trade deals with the EU, Japan, Vietnam, etc coming up afterwards. However, I don’t see those talks being as protracted if a China deal can get done.
• It seems to me that should we go into recession (say we get no China deal), things could REALLY spiral out of control. The reason is that Trump will have little chance of getting re-elected, and there is a high chance of a Democrat president. Equities could get killed, with increased regulation, increased taxes, fleeing wealthy, and ballooning debt from increased social services. I think we should look at any large second half selloff (and maybe any large post-Fed or post-payroll move) to look for "recession" calls.
• I am out of touch with Powell’s thinking. I feel like he had an epiphany of sorts, but am not sure what the cause is – a newfound belief in forward indicators, Williams’ research on being aggressive around the effective lower bound, some additional concern about the yield curve, he does whatever the markets tell him to, a desire to weaken the dollar (to balance other central banks), fiscal debt implosion should the Fed not help finance the debt, etc. All I know is, at the previous meeting, he said he was data dependent, the data has been decent but he is much more dovish than before. So clearly there is another piece to the puzzle. Let’s see if any light is shed on Wednesday.
• The past week confirmed my suspicions that Brexit negotiations could get ugly as we approach the deadline. However, I will be looking at any panic as an opportunity to fade the move. The reason is that I don’t think a Brexit deal prevents trade (eventually). Most of the EU’s trade partners are outside the EU. If you can’t get your oranges, cars, chocolate, scarves from the EU, you can get them elsewhere (temporarily) until a general framework is agreed upon. Let’s just keep an eye on it. This may be one of the reasons why ED-FF is widening.
The year double flies are starting to fall… EDU1 1yr double fly is around -1.5, after being positive for some time. It will be interesting to see if EDH1 6mo fly (that has been holding up the fly curve) follows downwards.
My main thought today relates to EDU9-FF. In less than 2 months, it’s pricing in for Libor-FF to widen almost 8bps. I’m not saying that couldn’t happen, but after an initial pop, Libor-FF hasn’t done much. Libor-FFs looks to be almost flat the past two weeks. AOTBE, I would probably want to consider:
1) Taking more profit on EDU9 put structures or conditional put flatteners.
2) Looking at EDU9-Z9 or EDU9-H0 steepeners vs comparable FF flatteners on dips.
Because while I think Libor-FF could widen by year-end, almost 8bps seems too wide. I’m guessing this could be related to the FFQ9 buyer.

I’m wondering if Draghi is reluctant to do anything major, with his term about to end. I was particularly surprised there was no talk of an ease today. I think being short ER fly structures make sense, as we could see more deferred stimulus later. If you think the ECB could ease further, you can sell any high flies centered in the back whites and front reds. If you think forward guidance could be coming, consider selling flies centered in the reds.

ERZ0 6mo single and double fly seem particular high (double fly currently 3.5/4). I realize these went sky-high yesterday. However, I don’t see why these would be that positive unless the ECB is easing. Trump is going to beat on them like a rented mule after China is over with. Pricing in hikes seems way too far in the distance.
It’s nice to be back! I see that some things haven’t changed (bid in equities, US data faltering but still constructive, US fixed income about the same, FFQ9 volume/OI still lofty). The three most notable changes are:
1) ED-FF spreads are much wider. This could be choppy, but I would think that ED-FF could continue to have widening pressure as we approach year-end.
2) I know BoJo was the favorite, but it feels strange to have the guy who lied about the benefits of Brexit to be leading Brexit. In any event, to get concessions, you need a little “crazy” on your side. You can’t have Parliament pass “no hard Brexit” resolutions and expect to get a good deal. Why should be other side give you anything after that?!? But this will mean we could get some panic as we head towards Halloween.
3) I’m not sure what happened with ERZ0 yesterday. I can’t tell if that was a fat finger (change in OI was small), or if there is an algo that looks for weak contracts. I tend to think it was a fat finger that caused the market making algos to shut down and liquidity to dry up. The one thing to be aware of however is that forward guidance is one of the central banks’ policy tools. The flies around the forward guidance point could go much lower. So all other things being equal, you want to be short flies around the points where you think forward guidance is possible. I have no view on when/if the ECB will engage in forward guidance. But on that note, we get the ECB soon.
FFQ9 OI increased 15K and EDZ9 OI increased 32K. It wouldn’t surprise me if the two contracts were related – using the FFQ9 to bid up the front futures, and selling EDZ9. Or not. These are the two gorilla trends we have been seeing in the markets. Libor-FF widened over 1.5bps (Libor higher while FFs rallied since yesterday), so that lit a fire on the front ED offers. This should help the EDZ9 vs 0EZ9 put structures, as well as any put structures on EDQ9 and EDU9. This could put downward pressure on the flies centered around the back whites and front reds. It’ll be interesting to see how the third gorilla trend (how well-supported EDH1 3mo and 6mo flies have been) will hold up on continued flattening.
FFQ9 OI increased 37K. Retail Sales were very strong and FFQ9 can’t sell off! Granted, the Fedspeak has been dovish: Powell gave the same dovish message, Kaplan is open to an ease and Evans is open to at least two 25bp eases. Trump not being able to stop speaking is not helping the trade talks (or the fixed income bears), although I suppose Trump talking could be a sign that trade talks aren’t moving. It’s looking more like a sure 25bp ease (probably with a dissent). I’m unsure about an IOER move on top of the ease. An IOER move could be a way to sneak in 30+bps to satisfy anyone who wants more than a 25bp ease.

The other interesting OI move is that EDZ9 OI increased 30K. The markets appear to be gearing for a wider Libor-FF at year-end. We’ve been widening noticeably now for over a week. Avoid being long EDZ9 (or EDZ0) in your structures without a strong view. We've seen Libor-FF widen 20+bps the past three years (at some point in the year), so there's no reason to think we couldn't keep going. I think there may be some value in selling EDM0 vs FFs as an indirect ED-FF widening play.

This doesn’t feel like a great time to get involved in anything involving 2019 rates. I have a preference to keep powder dry and be reactive to the Fed later this month as the Fed defines the current (easing) regime. Powell is a puppet Chair with the market gorilla pulling the strings. This is a wrinkle I probably want to be on the sidelines for.
FFQ9 OI declined 2 contracts. Yes two. 101K FFQ9 contracts traded Friday, and net positioning changed by 2 lots. I have to say, the gorilla is just doing a masterful job of spoofing or whatever the heck he is doing. Now I’m wondering if the gorilla kept nudging us up to a 50bp ease, if the Fed will go along.

EDU9 OI declined 106K. I would guess these are stops of shorts (since EDU9 was bid). Apparently, ED net long positions are near decade highs. I would think that the EDU9 move is related to the FFQ9 move. I’m dubious the Fed will ease 75bps in the next 2 meetings. And Libor-FF has been widening (even today’s fixing) so you would really only want to buy EDU9 if you though the Fed could ease 75 in the next 2.5+ meetings (EDU9 has 52.7% of the Oct meeting and 6.6% of the Dec meeting). If the Fed eased 50 in July, EDU9 will get partially carried for the ride, but I’m agnostic about EDU9 around here since I think a 50 in July is not likely.

I’m going to take some time off later this week and early next week. There won’t be much news, and manipulated markets are hard to send commentary about. I also think a fresh eye after some time off would help. I may not send Daily commentary, but I will send out a note if something looks interesting.
Now that I’ve had a little time to digest the events of the past couple of days, I have a few thoughts on the curve - in particular about the EDQ9 through EDU9 put structures and conditional flatteners on EDZ9 vs 0EZ0 and 0EU0 vs 2EU1. There were 4 reasons to like these trades:
1) I thought Powell was going to be a consensus builder. He seems to have made up his mind already and may be more interested in speaking his mind rather than listening to colleagues at the FOMC meeting. I did not think Powell would be so forcefully dovish. If he was, he should have eased last meeting! Just last week, I thought a skip was more likely than a 25bp ease. Since the “skip” tail is now <10% (we still have news), owning options in the front of the curve is less attractive (since the possible range is more defined).
2) Super Mario is supposed to unveil his stimulus measures. This central banker too, probably doesn’t want to disappoint the markets. So I thought the global longer end would stay bid (dragging the US with it), at least until the ECB meeting. But the markets may be pricing in EU fiscal stimulus, with Lagarde coming to the helm. I can’t imagine the ECB is not going to continue with QE, but some bulls may have bailed. When global yields are low, US fixed income looks that much more attractive (relatively).
3) We were supposed to get firmer inflation from the tariffs. I think we are seeing that now, and the inflation data could be supported for a couple of months. This should have pushed some eases back. But Powell seems to be data INdependent and this effect could be transitory, so I’m not sure this will have much of an effect.
4) I thought we could get a creep higher in Libor-FF. People are constantly talking about a dollar shortage. This effect could get exacerbated by year-end. If Trump is going to reduce trade deficits with the world, the dollar demand is not going to get lower. The US is one of the few countries offering positive returns. We also have a Brexit deadline in October. Nothing happened with the past deadlines, but people weren’t this negative before.

In reviewing the above, the only item that looks just as good (or better) now as when I suggested the options trades is #4. The markets were pricing in 25-30+bps for August anyway, so we’re basically near the high end of the range. I think adjusting any EDQ9-U9 put structures to accommodate 25+bps of Fed ease makes sense (converting to flies), unless you think the Fed could skip. EDU9 could be stuck around here (as a 25bp move would result in eases being priced in Sept, and a 50bp move could be a one-and-done).

Now that 2s-10s in the US are close to the recent highs, it should be interesting to see what the long end does. I tend to think the highs hold, unless we get a China deal or a recession gets more priced. You may want a steepener hedge if a bear steepening looks likely. But I suppose these didn’t cost much and were OTM, so if we rally, you can probably scratch or get out for close to 0.

I still don’t see the flies going positive (barring a trade deal), but I’m less keen on rolldown trades for some of the reasons mentioned above. My favorite trades now are the short high flies in the back of the whites, and any cheap Libor blow-out trade. I’ll report back on any new trades next week. Have a good weekend.