Wednesday, November 19, 2014

Eurodollars Futures Attract Flip-Floppers

Some traders just cannot make up their minds.  Open interest declined by a significantly (-255K) in Eurodollars as a result of trade on Tuesday.  It rose a significant (+270K ) as a result of trade on Monday.  Much of this changed positioning happened in the ‘red’ Eurodollars or those that encompass EDZ5-EDU6.  These contracts are at the heart of what many consider the Fed normalization ‘wheelhouse’.

It is difficult to be definitive as to the reason for this development, but I might repeat what was earlier this morning offered by one of my colleagues, ‘the war has begun’.  Clearly there are different opinions as to when and by how much the Fed will move policy rates during that period. 

Maybe not coincidentally, yields across the curve have stabilized somewhat over the last week after a gradual and uninterrupted limp toward higher rates following the mid-October rate meltdown.  This consolidation too speaks of indecision on the part of the recently emerging bearish contingent, which is why we have cautioned over the last few days that there is room for some short covering coming into the FOMC minutes release this afternoon. 

This condition has not changed despite the lower levels that trade in Eurodollars and Treasuries this morning.  The weaker trade in German Bunds and especially Schatz over the last few days has taken away some of the urgency for foreign buying of Treasuries for yield spread considerations.

As such, we should recognize the intermediate term trend as having moved to bearish following the mid-October reverse.  However, we remain concerned that the inability to push through to higher yields following some recently stronger reports, especially the employment report, points toward greater upside risk for Treasury prices today. 

The FOMC minutes could quiet growing concerns for the Fed dragging their feet on normalizing policy rates for reason of declining forward inflation expectations.  Even if this does not happen today, we would have an eye on any meaningful Treasury bounce as an opportunity to position short.       

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