A bit more on the Fed Funds market – a colleague sent some research that explained a bit more on what the implications were of adding the GSE to the list of potential counterparties with whom they can conduct large-scale reverse repo operations.
The story is – because the GSE’s legally cannot receive the IOER (Interest On Excess Reserves) which currently is 25 basis points – they are forced to lend money in the traditional fed funds over night market which because of the large amount of excess reserves the GSE’s have that rate is currently about 10 basis points (which is 15 basis points below what the Fed is paying). Recall in early April the FDIC started affecting that arbitrage opportunity http://financialfutures.typepad.com/kiss/2011/04/treasury-trading-update-3.html
Even though this is tangential to the main theme – it is worth reviewing – as is just about everything else I write. (Usually because I’m under some sort of mind altering spell of some sort). But to make a long story short – this move could be important in that if the Fed were to “aggressively target” the GSE’s – in terms of removing massive amounts of liquidity – that 15 basis point spread between the IOER and fed effective could move towards zero. Again yesterday this was initially worth about a one tick move and some put buying. Currently prices are not reacting – although floor sources indicate one player long Dec. call spreads and short Dec. put spreads might be looking to exit – call for more on that one.
Any who – prices are fighting the new down trend – that is underway in 30yr. futures – so maybe it won’t be a down trend after all – but I’m still ok with a short position and will add to it until proven wrong. Again call for details.
Larger flows from a.m. session listed below:
| 5/25/2011 | |||||
| screen pre open | |||||
| Paper | B | 11,000 | EDU93p vs 92p vs 91p 80p | flat | 9965 area |
| Above trade they buy 93p once sell the 92 and 91 once and buy 2 9800 puts | |||||
| Paper | B | 1,000 | EDM97 strad | 3.25 | 9972.7/73 |
| Paper | B | 2,000 | EDM 9975c | 0.5 | 9972.7/73 |
| Paper | B | 20,000 | EDU/EDZ 9925 p spread | 3 | N/A |
| Paper | B | 10,000 | EDM13 78/80 p spread | 2 | 9821.5/22 |
| Fed fund opts | |||||
| Paper | S | 500 | FFZ 9950 p | 0.75 | 9981/82 |
| Paper | B/S | 500 | FFZ9925/9950/9975 p fly | 1.25 | 9981/82 |
| 10yr. Opts | |||||
| Screen pre open | |||||
| Paper | B | 6,000 | TYU118p vs. 117p and 115p | .01 for the 118 | 12125 area |
| Paper | B | 500 | TYU115/129 strangle | 0.1 | 12124/25 |
| Paper | B | 3,000 | TYN120.5p vs | see below | 12124/25 |
| Paper | S | 1,000 | TYN120p | see below | 12124/25 |
| S | 1,000 | 119.5p | see below | 12124/25 | |
| S | 1,000 | 119p | see below | 12124/25 | |
| S | 1,000 | 122.5c | see below | 12124/25 | |
| Above 5 trades all a package the 120.5 puts over by .03 on the trade | 0.03 | 12124/25 | |||
| Paper | B | 500 | TYN121.5 strad vs Wk 4 121.5 strad | 1.04 N over | ^ 12124 |
| Paper | B | 500 | TYU125c | 0.18 | 12122/22.5 |
| Paper | B | 1,000 | TYN120.5/121.5 p spread | 0.25 | 12127/27.5 |
| Merril | B | 1,500 | TYQ123.5c | 0.26 | 12127/27.5 |
| Paper | S | 500 | TYU121.5 strad | 2.62 | ^12127 |
| JP Morg | B | 750 | TYN122.5/123.5/124.5 c fly | 0.08 | 12126/26.5 |
| Paper | B | 500 | TYU118p | 0.27 | 12128/28.5 |
| RJO | S | 500 | TYU121.5 strad | 2.63 | 12128/28.5 |
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