EGB OPTIONS: Large Bund put spread

Late on Friday Goldman Sachs wrote “pushback from a broad set of Fed speakers against an earlier start to easing has led investors to not only take down the odds of a cut in March, but also reprice the terminal level of Fed funds following a cycle of adjustment cuts higher by about 25bp.”

• “Additionally, the emphasis on a gradual pace of normalization has flattened the inter-meeting Fed funds gaps this year.”
• “On the low side, we note that even if the Fed were to begin cutting only in summer, it would still be able to deliver 125bp of easing without resorting to large decrements. Given our expectation that inflation will largely converge towards target over the first half of this year, this amount of easing isn’t historically anomalous.”
• “On the high side however, if the Fed did not begin easing in March, it would be hard to deliver more than 175bp of cumulative easing (given that there would be only seven meetings left in the year at that point).”
• “Given recent Fedspeak, this appears less likely without a significant deterioration in the growth outlook.”
• As such, they recommended selling the SFRZ4 95.75/96.25 strangle.

Bonds remain underpinned. TY, Bund & gilt futures have all registered fresh session highs since our most recent updates.

• Friday’s highs have been breached in all 3 futures contracts although more meaningful resistance levels flagged elsewhere are untested/intact.
• Tsys are 1.0-4.5bp lower in yield terms, with a flattening bias seen.
• German benchmark yields are 4.5-7.5bp lower, with the long end lagging.
• Peripherals are wider vs. Bunds, reversing some early tightening. The widening came alongside Euro Stoxx equity indices moving off best levels.
• Gilts bull flatten, with cash yields running 2-7bp lower on the day.
• Geopolitical strains centred on the Midde East and a heavy start to the week for Chinese & HK equities were touted as supportive factors for FI markets earlier today.
• However, S&P 500 e-mini futures have rallied alongside core global FI markets (aided by the move lower in Tsy yields).
• A steady, albeit slowed (vs. early to mid-Jan run rates) stream of global IG issuance has done little to derail the bid in core global FI markets.