Aug 9. Bad employment report. QE at Tues FOMC is priced in

Aug 9.  Yields tumbled to new lows on yet another weak employment report.  New recent curve lows as the market awaits announcement of further QE efforts at Tuesday’s FOMC.  2/10 spread fell 7 bps to 231.  Drop in red/gold pack spread was of similar magnitude to 228.5 bps.
–In my opinion lower rates aren’t really providing much of a boost.  For example, IBM was able to borrow for three years at 1%. A friend refi’d a 30 yr mortgage at 4.25%, just 1/4% above the UST 30 yr bond rate. Corporate spreads have collapsed. 10 yr yield has plunged from 4% to 2.8% in 3 months.  It’s not that rates aren’t low enough to create risk taking, the factors stifling growth are regulatory/tax uncertainty and unavailable credit to smaller businesses.  Additionally, an over-indebted household sector continues to deleverage.  While the trend toward lower household consumption may represent a sea change, the other two factors are likely to be addressed with increased vigor before and after the election. The move to lower yields is becoming stretched. 
–The focus has to change from supporting “risk assets” to supporting “risk PROJECTS”, and stabilizing physical capital assets (homes and capital equipment).  Just pumping up risk assets by relaxing accounting principles represents the discredited policies of Paulson, Geithner, Summers.   An increase in the value of paper assets while the gov’t pursues a policy of dollar depreciation isn’t solving anything. And while Michelle Obama’s european vacation displays astounding tone-deafness during a period of critical domestic unemployment, it might just represent an important turning point in media coverage.  Election results will likely hammer home a need to grow and support businesses through tax credits, etc.
–Big Aug events:  Aug 10, FOMC.  Aug 17, Treasury announcement?, end of month Fed’s Jackson Hole symposium.

Posted on August 8, 2010 at 2:44 pm by alexmanzara · Permalink
In: Eurodollar Options

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