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Eurodollar/Tsy Option Roundup, Fading the Selloff

US TSYS
Option volumes resumed more normal levels as European markets returned from extended Easter Holiday weekend.
  • A quick overview of Tuesday's trade: Eurodollar options saw much better call buying, primarily in 1- and 3Y midcurves -- buying insurance or fading the sell-off in underlying as futures priced in more aggressive rate hikes after StL Fed Bullard opened dialog on chance of 75bp hike at May 4 FOMC late Monday.
  • While calls drew better buying -- active accounts continued to maintain large downside put positions for varied rate hike scenarios.
  • Weighing on short end and contributing to inverted prices in Eurodollar Reds (EDM3-EDH4) through Blues (EDM5-EDH6) as rising recession concerns and/or ability of Fed to engineer a soft landing continues. Adding to the weaker tone (higher rates) IMF joined World bank opinion from late Monday: knock-on effect of Russia invasion reducing global growth/increase inflation forecasts.
  • Similarities and differences for Treasury derivatives - Treasury futures traded weaker all day while curves reversed steeper profiles after the early IMF global growth downgrade, extended flatter in late trade (2s10s -6.05 at 33.79 in late trade compares to +42.89 early high -- this in itself quite a feat after the pare traded inverted low of -9.561 just two weeks ago. Treasury option volumes slipped in the current session vs. Monday with put structures drawing better interest.
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