BlockBeats News, October 4, Morgan Stanley’s rate strategist led by Shaun Zhou pointed out that the US Treasury options pricing shows that the US government shutdown, which started on October 1, will last for at least 10 days and could potentially extend to 29 days. The Treasury futures options “will price in the risk premium for important economic data release dates.”
In the report, Morgan Stanley’s strategist wrote that although the final release date of delayed economic indicators is yet to be determined, the options market will price in the risk premium for multiple future dates based on the probability distribution. This analysis is based on the price of 1-day straddle options, a options structure that simultaneously buys or sells put options and call options with the same strike price. The so-called breakeven point of a straddle option represents how much the market needs to fluctuate for the buyer to profit.
The report shows that the breakeven point on the day of the employment report release is often 5 basis points higher than the days before and after the release day. Assuming that the September employment report is released four business days after the end of the government shutdown (as was the case in 2013), the market implies a much higher probability of a shutdown lasting 10-29 days than shorter or longer periods. (Jin10)
