Saturday, November 17, 2018
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non-synthetic futures and option strategies

rate futures report: europe debt strengthens low rate view

chicago (15:54 et)--investors seeking safe places to park their money raised their bids monday for u.s. interest rate futures contracts, a move that amounted to a reduction in short- and long-term yields. turmoil in europe, not necessarily tied to sexual assault charges against the international monetary fund's chief, helped trigger the flight-to-safety buying.

the main catalyst was heightened speculation that greece will default on its debt, even as other european nations debate another financial aid package.

euro-zone troubles point to concern that global economic growth is slowing, as futures traders interpreted the situation as a reason for the u.s. federal reserve to keep its short-term funds rate target near zero for another year or longer.

on the domestic front, traders received economic data in line with the slower-growth scenario.

the federal reserve bank of new york reported monday that its empire state manufacturing index had fallen to 11.88 in may, from 21.70 in april. economists surveyed by dow jones newswires projected a smaller decline in may to 18.0.

saturday night's arrest in new york of imf managing director dominique strauss-kahn "throws the whole [european] sovereign debt problem into weird-land," but it doesn't materially change the situation, said lawrence morgan, senior account executive for the futures brokerage firm archer financial services.

in federal-funds futures, traders see only even odds for its first rate increase to take place next spring, and the market also reduced bets monday for the tightening to happen before the middle of next year.

may 2012 fed-funds futures--measuring expectations for the late april federal open market committee meeting--priced in only a 50% chance for the panel to raise the rate to 0.5%. that's down from a 60% chance at friday's settlement. the same contract was fully priced for the move only three weeks ago.

the longer-dated july 2012 contract--gauging the market's outlook for the late june 2012 fomc meeting--priced in an 88% chance for a 0.5% rate. that's down from a 100% chance at friday's settlement.

while recommending to take some profits, barclays capital research urged its clients "look for opportune entry points to reinitiate the 'low for long' [rate] trades."

"we still expect the fed to stay on hold for a long time," said barclays analysts in a trade note issued monday.

the fomc has kept its funds rate target inside a record low range of 0% to 0.25% since december 2008, one of several extraordinary measures adopted by the central bank to help the economy recover from a severe recession.

eurodollar futures prices settled monday close to session highs, which means implied rates were near the day's lows.

the nearest one-year eurodollar calendar spread continued to tighten, also emblematic of the market's low rate view.

june 2012 eurodollar futures priced in a rate only 48 basis points--or less than a half-percentage point--higher than the rate priced into the june 2011 contract.

the same spread was at 51 basis points at friday's settlement. it had been as wide as 83.5 basis points in mid-april when traders worried that soaring commodity prices would force the fed to fight off inflation by raising rates.

traders aren't as concerned about inflation as commodity values have come down.

 

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