US TSYS: 2Y SWAP SPD GAPS TIGHTER/FUNDING PRESSURE ON RISE

US TSY SUMMARY: Tsys trade mixed after the bell Monday, relative quiet for

domestic markets, eyeing Brexit and other headlines out of Europe (GBP/US$ fell

to 18-month low (1.2507) on BREXIT vote pull back. 

- Rather decent volume on day as long end outperformed all day, yld curves

flattening; 2Y revisiting levels

not seen since Jun 2016 -- appears short term funding pressure for banks is

being felt earlier than normal headed into year end. Bank shares punished on day

(equities managed to stage a strong rally off new lows for year (SPX +9.0 at

2645.0 in late trade)

- Decent if not exactly heavy upside call buying in Tsy options, conditional

bull curve steepeners in Eurodollar options (Whites/Reds, Greens/Golds) all

targeting potential rate pause/cuts in 2019 and beyond. 

- No new corp issuance,  $38B 3Y note auction (9128285R7) Tuesday. Salient data

for Tuesday (estimates): Nov Final Demand PPI (0.6% prior, -0.1% estimate).

- Tsy cash/ylds: 2Y 100-01.5 (2.723%), 5Y 100-25 (2.704%), 10Y 102-11 (2.850%),

30Y 104-25 (3.126%).

US TSY FUTURES CLOSE: Trading mixed with the long end outperforming; strong

volume (TYH 1.92M); curves flatter; update:

* 2s10s -0.537, 12.673 (12.033L/14.441H);

* 2s30s -2.683, 39.056 (39.088L/43.316H);

* 5s30s -3.176, 41.776 (40.850L/45.131H);

Current futures levels:

* Mar Ultra bonds up 12/32 at 157-12 (156-29L/158-03H)

* Mar 30-yr Bond futures up 05/32 at 143-16 (143-06L/143-31H)

* Mar 10-yr futures down 02/32 at 120-21 (120-18L/120-30H)

* Mar 5-yr futures down 1.5/32 at 113-20.75 (113-19L/113-26.5H)

* Mar 2-yr futures down 0.5/32 at 105-22.75 (105-21.75L/105-25.5H)

US EURODOLLAR FUTURES CLOSE: Trading mildly higher with a parallel shift across

reds through golds; strong volume led by Red Dec (EDZ9 710k). Current White pack

(DEC'18-SEP'19):

* DEC'18 +0.0075 at 97.2025

* MAR'19 +0.025 at 97.230

* JUN'19 +0.015 at 97.175

* SEP'19 +0.020 at 97.155

* Red pack (DEC'19-SEP'20) +0.025-0.020

* Green pack (DEC'20-SEP'21) +0.030-0.025

* Blue pack (DEC'21-SEP'22) +0.025-0.020

* Gold pack (DEC'22-SEP'23) +0.020

US DOLLAR LIBOR: Latest settles, 

* O/N +0.0012 to 2.1820% (+0.0032 last wk)

* 1 Month +0.0203 to 2.4205% (+0.0587 last wk)

* 3 Month +0.0049 to 2.7759% (+0.0349 last wk)

* 6 Month -0.0080 to 2.8778% (-0.0068 last wk)

* 1 Year -0.0165 to 3.0840% (-0.0195 last wk)

US SWAPS: *** Not a good sign for the the short end -- Spds gapping tighter

across the curve -- making new lows for year in short end, 2Y revisiting levels

not seen since Jun 2016, while 5- and 10Y are at May 2018 lows 30Y at April 2018

inversion/lows. Appears short term funding pressure for banks is being felt

earlier than normal headed into year end. Earlier flow favored rate receiving in

2s-5s and -n-line spd curve steepeners. Latest spd levels:

* 2Y -3.12/12.12

* 5Y -2.75/9.00

* 10Y -1.75/2.75

* 30Y -1.31/-16.25

US TSYS: *** /REPO REFERENCE RATES: (rate, volume)

* Secured Overnight Financing Rate (SOFR): 2.30% vs. 2.34% prior, $912B

* Broad General Collateral Rate (BGCR): 2.28% vs. 2.31% prior, $432B

* Tri-Party General Collateral Rate (TGCR): 2.28% vs. 2.31% prior, $415B

PIPELINE: NO NEW ISSUANCE MONDAY; only $1.50b Priced Last Week

OUTLOOK: Data/speaker calendar (prior, estimate): 

- Dec 11 Nov NFIB Small Business Index (107.4, --) 0600ET

- Dec 11 Nov Final Demand PPI (0.6%, -0.1%) 0830ET

- Dec 11 Nov PPI ex. food and energy (0.5%, 0.2%) 0830ET

- Dec 11 Nov PPI ex. food, energy, trade (0.2%, --) 0830ET

- Dec 11 08-Dec Redbook retail sales m/m (0.8%, --) 0855ET

- Dec 11 Nov Kansas City Fed LMCI 1100ET

- Dec 11 US Tsy $38B 3Y note auction (9128285R7) 1300ET

Eurodollar/Treasury Option Summary 

Eurodollar options, Pit/screen:

* 7,000 Green Dec 71/73 calls over risk reversals at 0.5 vs 9724.5/0.25%

* -5,000 Sep 71 puts at 13.5 vs 17/0.10%

* +10,000 Sep 67/68 put sprd at 2 vs 20.5/0.10%

* 6,000 Green Dec/Blue Dec 76 call sprd at 0.5

* +10,000 Green Mar 71/73 2x3 call spds vs. -20,000 Green Mar 70 puts, 3.0 net

db

* 5,000 Mar 71/72 1x2 call sprd at 1

block, 10:05:29ET,

* +20,000 Mar 72 calls at 4 over Short Apr 75/76 call sprd, note 40k traded in

pit at 3 over the call sprd

POV, MAKING A SPLASH IN CONDITIONAL CURVES

* Paper bought 20,000 Green June'21 97.50/97.75 call spds over the Gold June'23

97.50/97.75 call spds, paying 2.0 for conditional bull curve steepener early Mon

* Interesting structure for several reasons:  selling Gold pack structures (sort

of a position black hole in more than one way...illiquid, poor vega performance)

is a a decent sale to help fund buying Green call spd if you think Fed will

pause or potentially cut rates with Greens adjusting higher.

* Also note, the Gold pack call spread is an opener -- no open interest yet.

* Gold expiry options are now in the 'post-libor' part of the curve and may no

longer be the benchmark at that time. Expect to see more of such structures

trade in the near- to mid-term as long as hawkish Fed tone for 2019 continues to

moderate (traders/dealers seeing one hike next year vs. 3-4 only a couple weeks

ago).

* 30,000 Short Apr 75/76 call sprd vs Mar 72 calls for 3

* 25,000 Short Mar 72/75 call sprd at 6

* 10,000 Short Apr 72/73 call sprd at 3

* 7,000 Apr 73/75 1x2 call sprd at 0.5

* -40,000 Mar 75 calls at 1

* -5,000 Jun 77/78 call strip at 1.5

* +10,000 Jan 73/75/76 call fly at 0.5

* -13,000 Short Dec/Green Dec 63/65/71/72 call condor strip, 15.5

* +20,000 Green Jun 75/77 call sprd at 2 over Gold Jun 75/77 call sprd;

conditional bull curve steepener

* 17,000 Green Dec 71/72 call sprd at 8.5 vs 9725/0.35%, on screen

* 15,000 Short Jan 63/65/71/72 Call Condor at 7.5 vs 9715.5/0.10%

Decent overnight volume (>230k), salient flow includes

* 29,000 short Dec 71 calls and 22,000 Green Dec 72 calls

* 6,000 each short Dec and Green Dec 65, 66 and 71 calls

* 8,000 short Dec 72 calls

* 4,000 each short Dec 71 and 72 calls, Green Mar 70 and 71 calls

* 10,000 Green Mar 73 calls

* aforementioned 10,000 short Jan 68/70 put spds

Tsy options, Pit/screen:

POV, POSITIONING FOR POTENTIAL RATE CUTS

- Aside from conditional bull curve steepeners via Eurodollar options (Whites

vs. Reds, Greens vs. Golds), Tsy options see continued interest in buying upside

call insurance

- Scale buyer on screen today of some 25,000 USG 146/149 call spds from 24- to

25/64 -- strikes correspond to 2.98% and 2.891% respectively (current 30YY is

3.134%), opener with open interest 3,079 and 1,993 respectively coming into the

session.

- Latest MNI PINCH spline-based model has market pricing in 100% of rater hike

at the Dec 19 FOMC, and only 6.7% of a hike at the January 30 FOMC. Significant

hike probability repricing through 2019: first move above 50% is at the June 19

FOMC (57.2%), high for the year at the September 18 FOMC (77.1%), then declines

to 67.7 in October and 55.4% at December 11 meet.

* 3,000 TYF 121.75/122 call spds, 2/64

* +1,500 TYF 119.75/122 call over risk reversals, 2/64 net

* Update, total +4,000 FVF 113/113.5/114 2x3x1 put flys, 1/64 earlier

implieds under pressure after the bell

* -1,000 TYF/TYG 120.5 straddle spds, 34/64 net credit/Feb over

* -1,300 TYG 120.5 straddles, 1-18/64

* -1,500 TYH 121.5 calls, 33/64

* +1,000 FVF 113/113.5/114 2x3x1 put flys, 1/64

--MNI Chicago Bureau; tel: +1 312-431-0089; email: bill.sokolis@marketnews.com

[TOPICS: MTABLE,M$U$$$,M$$FI$,MN$FI$,MN$FX$]