May 18. A Bronx Tale

–Interest rates continue to plunge, with tens at 1.70, essentially at new lows. 2/10 down 7 bps to 141. Red/gold pack spread at 125, also a new low. The Fed’s pledge to keep rates low through late 2014 had shifted the market’s interest to the blues (2015 contracts) in terms of setting shorts through puts and calendar spreads. Now those plans have gone awry, as green/blue calendars have plunged. (I’m truly sorry Fed’s dominion, Has broken market’s social union…) I marked green/blue pack spread at 47 yesterday, was around 60 two weeks ago. So, one could argue that the Fed’s pledge has backfired in an unanticipated way, though the ECB’s overt pledge of low rates through the LTRO has also spectacularly flamed out in terms of calming markets.
–There was a seller of 40k EDZ2 9925/9900 put spreads vs 9962c yesterday at 2.5. Trade was an exit. I am wondering if paring down of positions is due to a shift in market perceptions about the economy, or perhaps has a little bit to do with JPM fallout. There was also a buyer (only 500 according to prelim sheets) of USQ 173c for 2 and 3. Probably represents yield level of around 1.5% for the long bond as the contract is worth about 6 bps per point. The guy just looked at yesterday’s yield drop and figured the bond yield would fall 8 bps per day so he’ll be in the money in about a month. Simple.
–NATO summit starts. Protesters are supposed to be around the intersection of the Chicago Fed and the CBOT, targeting a bunch of clerks in trading jackets that are barely eking out a living. It brings to mind the story of protesters who thought it would be clever to swarm the LIFFE exchange, but who ended up having the same fate as the bikers who visited Sonny’s Bar in the Bronx Tale (youtube “now you’s can’t leave”, http://www.youtube.com/watch?v=pTzie3yKh40 ) Those were the glory days of trading floors…

May 16. US curve flattening continues…

The trend of curve flattening in the US remains firmly in place. 2/10 down another bp to 150, while red/gold pack spread fell over 3 bps to a new low of 134. Option trades were partially responsible for the move in the euro$ curve. Early in the day there was a buyer of 50k June (red) midcurve 9937p for 7-7.5 (9.5s). Prelim open interest from CME shows volume of only 10k but an open interest drop of 29k…trade appears to be an exit. At same time TYU 132.5 straddle was sold down from 2’53 settle Monday to 2’41 yesterday, taking vol back down below 5%.
–This morning gold is down over $25 with GCM around 1530, near the spike low of the end of last year. Same story with silver. The markets that ran up in the first 3 months of the year, whether due to liquidity or “economic growth prospects” have made a round turn trip. That includes EUR, now around 127, just about where it started the year, having popped up to 135 in the interim. It seems to me that these are important levels to try to find support across many markets, or else face wholesale liquidation.
–As a side note, one of the catalysts, or more appropriately, excuses, for the current turmoil is JPM. Interesting to note that while the stock has dropped 22% from the high in March (46.50 to 36), it still isn’t near the low of last November which was around 28. Given the outsized media coverage of JPM, one might think that vulnerability in one of the strongest global banks would be reflected in higher LIBOR settings? Nope…EDM still holding around 9949.5 and 9950 straddle 5.5/6.0.
–Today’s news includes Housing Starts at 690k, Industrial Prod +0.5 and FOMC minutes.

May 15. Curve flattens further

Curve continues to be steamrolled as ten year note yield fell 6 bps to 1.78%. 2/10 down 7 bps to 151. New lows in reds to all deferred contracts with red/green at just 25.5 bps and red/gold down nearly 11 bps to only 137.5. I think red/gold is too low relative to treasury curve (and rates in general); probably worth buying red/gold pack spread and buying some ten year treasury calls as a hedge. In fact, I have just done some of this trade for myself, using EDU13/U16 as the spread, paid 133.0.
–While the curve is at multi-year lows, many “risk” or “liquidity driven” markets are at or near lows for this year. For example Crude has made a new low. Copper is the lowest it’s been since early January. Same thing with India’s Sensex or Korea Kospi, or silver or gold. In fact, US equities have held in remarkably well as SPM started the year around 1260-1280 vs 1340 now. While US commentators wring their hands about recent equity losses, non-dollar investors have been rewarded by using US stocks as a safe haven, with the added benefit of dollar appreciation.
–The question now is whether circumstances that have been driving recent price action abate or accelerate. I lean toward the latter as these moves have a tendency to feed on themselves, and central banks are being perceived more like the man behind the curtain rather than the all-powerful Wizard of Oz. (The next FOMC is a long month away). In the old days during times like this we might get rumors of “emergency Fed meetings” to make things more interesting, now we just get flying monkey Fed speakers that transparently guide us to fields of sleep inducing poppies, otherwise known as the next rounds of QE.

May 10. The road to deflation

–Once again all eurodollar calendar spreads settled at new lows. Red/gold pack spread was down 2 to just under 152. Red/green at just 30 bps. 2/10 treasury to 157 despite ten year auction. 30 yr bonds auctioned today.
–There was significant early buying of eurodollar straddles that fizzled by days end. For example, EDU 9950^ traded up to 16.5, but settled 14. EDZ2 9950^ traded 20.5 but settled 19.5. EDM2 9950^ traded 7 but settled 5.5.
–EDU12/EDU13 spread was as low as 4 bps before coming back to settle 6.
–Today’s news includes Trade deficit expected -49.5b, Jobless Claims expected 366k.
–I saw a piece written by Pat Buchanan about the rise of nationalism across the globe. On a longer time frame I think the impact on int’l trade has to be negative. I think the recent decline in the price of oil underscores this idea. The question now is how central banks respond, and if new financial measures will bolster asset prices. Will the Fed’s new QE program be sterilized? Will the Fed further cut the swap rate to the ECB? By funding nationalized banks, (like Bankia), is the ECB funding sovereign states, and should the US Fed be involved in such programs?
–The world is likely on the verge of a massive deflationary shock. Central banks have attempted to forestall the event with cross holdings and balance sheet expansion but each new program has a shorter shelf life.

May 7. Employment report confirms sluggish economy

–Employment data was weaker than expected and markets reflected disappointment. (From Liscio Report: “Almost 70% of job gains came from bars and restaurants, temp firms, and retail, which do not seem the strongest foundations for long-term growth.”)
–The curve made new recent lows with 2/10 at 163 and red/gold euro$ pack spread at 158 (down 6 on the day). In early December last year 2/10 got below 150 for a couple days, a target area for later this month. All back month euro$ calendar spreads made new lows. Crude oil broke below $100/bbl, down 6.5% in the past few sessions. SPX fell 1.6%. Implied volatility in treasuries sank to new lows. There simply isn’t much prospect for a move to higher rates over at least the next quarter, and perhaps for the rest of the year. Those who had hoped to revisit the higher yields of mid-March are likely to be relentlessly ground down into submission. At the end of Friday, a colleague mentioned that EDU14 should continue to rally. I too think rates edge lower, but I responded that I have a hard time paying 9912 (88 bp yield) for a contract that far out. And that’s the core problem, it SEEMS like it’s too high, but odds are that it rolls higher yet. Which isn’t so bad if you don’t have a position, but is gut wrenching on a daily basis when you’re short, at least in my personal experience. I suppose this week’s treasury auctions could hold the market down, but 1.88 for US tens still seems pretty good compared to 1.58 bunds.
–A line from David Rosenberg also captures a big macro theme: “The ‘baby boomers’ are driving the demand for income which will keep pressure on finding yield which in turn reduces buying pressure on stocks.” I recall the mantra before 2000, when everyone repeated ad nauseum that baby boomers HAD to put their money in stocks for retirement. Well now it’s 15 years later. And they can’t retire.
–One other interesting footnote for those who think “Tax the rich” is the answer: Americans renounced their citizenship in record numbers in 2011. http://rt.com/usa/news/us-citizenship-tax-denounce-521/ The absolute number seems small, only 1788, but I don’t think they’re part of the 99%. As the article notes FROM AN IRS REPORT: For some US taxpayers abroad, the tax requirements are so confusing and the compliance burden so great that they give up their US citizenship.

May 4. Employment day. NFP expected 165k

Employment report today with payrolls expected 165k and rate of 8.2%.
–Going into the data, implied vol in treasuries at the lows. Eurodollar calendar spreads in euro$’s also on the lows. Yesterday there were short dated put buyers and other trades for protection in case of a bearish number. That’s an easy trade from these levels, either placing a small bet on a big NFP or unwinding some longs. What is difficult is finding something to buy to protect against a surge higher. I looked at US1K 144c yesterday and they were 5-7, more than a point out of the money. I was able to buy calls half point out of the money with two days left for 2 last week. In any case, my personal bias is for lower rates. Even if the data is stronger than expected I think there will be aggressive dip buyers. But you never know with this data. What is certain is that oil started the month at 106 and has plunged to 101.50. Gold is off $30 in the past few days and at low end of range. Silver made new recent lows yesterday and is in a two month downtrend. Copper has been trying to rally but has faded back in the last couple of days. The inflationary signals that bond bears have been counting on seem to be sputtering. And geopolitical events that could create safe haven buying aren’t abating.

May 1. Flatter curve, lower vol. RBA cuts 50 bps…more than expected

RBA was expected to cut by 25 bps but went 50 (to 3.75). China PMI was 53.3, slightly less than expected. Today’s US news includes ISM expected 53 from 53.4 last, and there are several Fed speakers. Chicago PMI yesterday was much weaker than expected. The grinding trends in the interest rate market continued, with a flatter curve and lower vol, signaling a sluggish economy at best. The economic data is coming in weak, not just Chicago PMI but the Dallas Fed Bus Activity was -3.4 from 10.8. And the Chgo Fed’s Nat’l Index last week was very soft. I have a hard time seeing tens get back much above 2% even if there is a surprisingly strong employment report Friday, though there are cheap puts for anyone itching to play the downside. Fed speakers yesterday including SF Williams and (not surprisingly) Dallas Fisher showed little inclination for more accommodation, a theme that will likely be sounded again today.
–This isn’t new, but still eye catching: Erskine Bowles “explained that 100 percent of the tax revenue that entered the Treasury in 2011 went out the door to pay for mandatory spending — such as Medicare, Medicaid and Social Security — and to pay the interest on our staggering $15.6 trillion national debt.” …That means that every single dollar we spent on everything else, including two wars, national defense, homeland security, education, infrastructure, high-value-added research and the like, was borrowed. “And,” he warned, “half of it was borrowed from foreign countries. And that is a formula for failure in anybody’s book.”

http://www.huffingtonpost.com/2012/04/30/erskine-bowles-economic-crisis_n_1464999.html?ref=business

April 30. Treasuries remain firm with flatter curve bias

Relatively big week with PMI data for US, Europe and China. ECB on Thursday. US employment data Friday. Greece and France elections this weekend. Elections will likely signal a further shift against austerity and a step toward bank nationalizations. The eurozone has made the following deal with banks: “We ask you to buy our sovereign debt (because the private market won’t) and we will finance through LTRO, because our revenues/tax collections can’t cover the increased interest expense along with other obligations of the state.” Seems like nationalization already. I don’t know the details but have seen some items about plans for a “bad bank” in Spain. The value of bad assets must be slashed and recognized.
–Today’s data includes Personal Income and Spending expected +0.3 and +0.4 with Core PCE +0.2.
–Last week US treasuries closed on a strong note, with tens at 1.93% and 2/10 at 167 (a new recent low). The low I have marked for this calendar year is 159 on Jan 31. A weak employment report will likely take that low out.
–Interesting note is that California’s April income taxes are coming in lower than expected. Warning sign for the country as a whole? http://www.sco.ca.gov/april_2012_personal_income_tax_tracker.html
–A bright spot for the US has been strength in equities, though I don’t think that’s enough to spark a self-sustaining recovery. Especially when I read stories like the following regarding IBM (italics mine): “The direct impetus for this column is IBM’s internal plan to grow earnings-per-share (EPS) to $20 by 2015. The primary method for accomplishing this feat, according to the plan, will be by reducing US employee head count by 78 percent in that time frame.
Reducing employees by more than three quarters in three years is a bold and difficult task. What will it leave behind? Who, under this plan, will still be a US IBM employee in 2015? Top management will remain, the sales organization will endure, as will employees working on US government contracts that require workers to be US citizens. Everyone else will be gone. Everyone. http://betanews.com/2012/04/27/the-downfall-of-ibm/
–I would like to think that manufacturing and energy production will have a place in rejuvenating the US economy. When all that’s left is sales and government, the question becomes “who is left to sell to?”

April 26. No drama in FOMC meeting

–There weren’t any surprises in yesterday’s FOMC. Curve edged steeper. Tens closed at 1.99%. Stocks were buoyed during the press conference when BB said the Fed could act if needed. The low in TYM occurred after the economic projections where several members moved forward the time of initial tightening, from 2015 and 2016 to 2014. In January, 5 saw tightening in 2015, this time 7 did. But interest rate futures bounced back and closed near highs.
–The Fed members aren’t great forecasters, and their estimates of growth, unemp and inflation reveal institutional bias. For example, the rate of GDP growth declined throughout 2011, but is forecast to go higher. The unemp rate fell, and THAT trend is expected to continue down the exact same path. But the inflation rate doubled from the beginning to end of 2011, and is projected to come down! Right. Growth higher, employment better, but inflation fades. In a world with more uncertainties than usual, in Europe, Iran, N Korea, and China (where the CEO of CAT confirmed a slowdown in construction), all forecasts are subject to change. My personal forecast is that more QE will be front and center by June, notwithstanding BB’s discussion about “stocks and flows” and the idea that the end of twist won’t have much impact. In fact he said (and I am paraphrasing) that the cessation of other QE’s didn’t have negative impact on rates. Really?? Then the easy follow-up question is why then, did you engage in more? And the answer is that RATES weren’t negatively impacted, EQUITIES were. THAT’S why we had to continue…
–News today includes Jobless Claims expected 375k from 386 (important because this data has recently popped back up close to 400k again). Also Chicago Fed Nat’l Activity which was -0.09 last.

April 16. All about Spain

–A bit of drama on the trading floor Friday as several large market making groups boycotted the euro$ option pit because of block trades that were deemed unfair due to lack of transparency. The story has been covered already, but deserves mention here only because it may have negative liquidity ramifications going forward.
–Spanish yields again rose Friday and CDS reached record levels, above 500 bps for 5 yr. By the end of the day, US equities closed at their lows, with SPX down about 1.25%. However the banks, which were leaders on the way up, were slammed: Citi, Wells, JPM all down around 3.5% while BofA lost 5.3%. GS -4.4% and MS -5.2%.
–In Spain, “cash business transactions over 2500 € are to be banned” in an effort to tighten tax collection. John Mauldin notes that many will try to get cash out of the country (as will occur with other peripherals). What does that do for gold coin demand? In another story about cash controls, China is LOOSENING the band on the yuan, which some say may also increase investment outflows from China. Safe haven flows to US?
–US curve flattened with tens sub 2% again. After last month’s surge to 2.40, the subsequent plunge in rates leaves bad positions which face more pain with increased eurozone stress. Euro$ calendar spread EDZ12/EDZ13, which was around 10 early in the year, then ran to 36.5 on the mid-March bond sell off, is now back to 14-14.5. I am beginning to think these spreads will invert (EDZ13/14 and EDU13/14). Financial strains will also ratchet up calls for more QE in the US, which may put pressure on funding rates if sterilized in nature (repos). I don’t know if the ideas are related, but there was a buyer of about 15k FFN 9975p for 0.5 Friday…selling pressure on FF’s due to massive bond repo? Even FFZ2 9975p are only about 1.5 bps. Might be well worth buying these as cheap insurance.
–There is some fairly good open interest in TYM 133 and 134 calls…around 95k in 134′s. Generally the idea has been that the market is capped on the upside, and that rallies will be grinding, associated with lower vol. I would strongly guard against that sentiment. The european crisis and other geopolitical wildcards could see treasuries revisit their low yields, i.e 1.80 in tens, very rapidly.
–In US news Retail Sales expected +0.3% and +0.6% ex-autos. Empire State expected 18.0.

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