IB Traders Insight Fixed Income Interest rate play ahead of nonfarm payrolls? Heading into the October employment report, it is hard to believe that since the September reading was released, the yield on the 10-year note has played within a range spanning 3.48% to 2.86%. The crash for yields mid-month was brought about by a confluence of global threats including the spread of the Ebola virus, signs of global slowdown and resultant stock market correction. The surge in bond and Eurodollar futures prices saw some speculators stopped out of their positions on heavy, heavy trading volume. Open interest across Eurodollar futures plummeted as positions were liquidated. Prior to that point, speculative shorts in the Chicago market were banking on a Fed rate rise sooner rather than later. Since the middle of October, the number of positions held by investors in the March 2015 three-month Eurodollar futures contract have surged by 323,000 lots to 1.381 million. This jump in open interest is the largest across the 2015/2016 complex. And since the implied yield on the contract has remained in a tiny 4-basis point range since mid-October, it begs the question why investors are building positions at this strike. The implied three-month cash yield of 0.27% will struggle to go much lower assuming the Fed does not further attempt to stimulate the economy. To do so would require a further slide in stocks on more geopolitical unrest. Chart – Surge in Eurodollar open interest at the March 2015 expiration (ow.ly/DVk1M)
Posted on: Thu, 06 Nov 2014 15:13:56 +0000
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