July 26. Long term pension returns at historic lows

–Yen has strengthened this morning on concerns that direct stimulus from Japan will fall short of expectations.  USDJPY fell from 105.80 yesterday to 104.26 now.  Crude oil is continuing to fall, and this morning is right at the 50% retrace (CLU6 contract) from the low in January to the high in June, $42.77.  Crude should find support in this area.  If not, then high yield should start to deteriorate after a strong run.

–Not all measures of the curve are making new lows, but red/gold pack spread did close at a new low of 46.25 bps.  2/10 is quite a bit steeper at 84 bps, down 2 on the day, and 5/30 closed at 115.  The bond contract, USU has seen 6 of the last 7 closes between 171-15 and 171-21.  This morning it is taking another stab at the upside.

–EDZ6 made a new low yesterday, having fallen over 25 bps in the past month.  Open interest continues to fall in EDU and EDZ, suggesting long liquidation related to money market reforms.  Yesterday there was heavy buying in EDV6 and EDZ6 9912/9925 c 1×2’s at 2.0 and 1-1.25 respectively to play for a modest bounce.

–From today’s WSJ: “Long-term returns for U.S. public pensions are expected to drop to the lowest levels ever recorded, intensifying a national debate over whether states and cities can continue to afford pension obligations.”  As John Mauldin points out in his latest missive, when government pension programs are not funded, taxpayers must foot the bill.  He points to Chicago and its massive property tax increase.  Link at bottom.  If long term returns are at historic lows, how much better can they be expected to do from here, with stocks near record highs?  So, while europe struggles with bail-ins at banks, US taxpayers can look forward to bailing-in pensions.

Posted on July 26, 2016 at 5:25 am by alexmanzara · Permalink
In: Eurodollar Options

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