May 21. JGB yield rise along with hints of QE reduction could cause bond sell off

–US interest rate futures closed slightly lower yesterday with ten yr note tacking on just over 1 bp to yield 196.3.  There were some large trades in September ten year options, new put spread buyers and a new seller of 20k 129/133 strangles 58 to 57.   The 129 strike is about 22-23 bps away, which would equate to around 2.19 in current ten year yield (with another 10 bps of premium cushion).
–The big action yesterday was the early precious metals plunge, followed by a powerful rally.  Silver made new lows for the move, taking out the mid-April low on Sunday evening, but closed slightly higher on a range of $3.  However, open interest was only up by 2900 contracts.  Gold held last month’s lows and closed higher on the day, huge volume of 276k with open interest +7900.
–Not much in the way of economic news today, though both Bullard and Dudley speak, at 11:30 and 1:00 NY time respectively.  The big event is Bernanke’s testimony tomorrow in front of the JEC. Bonds are trading heavy; additional hints about QE reduction should force the hand of weak longs.
–Yen is lower today after yesterday’s bounce, USD/JPY 102.70.  JGB yield continues to press higher, now up 5 bps to 89.  It appears as if there are growing doubts that Japan can keep a firm hand on the financial forces it has unleashed, like Icarus flying too close to the sun.  If JGB yields continue to surge, there will be global bond market reverberations.

May 20. Bernanke in front of JEC Wednesday, hint of QE reduction?

–BBG “Japanese Economy Minister Akira Amari said further losses in the currency would threaten to negatively affect people and the government’s job is to minimize that.”  The yen has bounced, but the Nikkei is up 1.5% (nominally above DJIA) and JGB yield is up a few bps to 84.  Silver plunged at the open last night to take out mid-April lows, though gold is holding above April’s low so far.  US interest rate futures marginally lower in spite of precious metals and other factors that are somewhat supportive, for example N Korea missile tests.
–The big news of the week will be Bernanke’s appearance before the Joint Econ Committee Wednesday.  FOMC minutes also released later that day. Reuters adds to the QE chorus: “Job market gains could lead Fed to taper QE3 early”, mostly citing SF Fed’s Williams comments from last Thursday.  If Bernanke echoes those sentiments Wed, the one percent handle in tens will become a distant memory.
–”This year, big U.S. companies have given the go-ahead for $286 billion of buybacks, up 88 percent from the same period last year, according to Birinyi Associates,”  If QE is dialed down, could buybacks lessen the impact with respect to stocks?
–Chicago Fed National Activity Index for April released today, last at -0.23 and three month moving average edged into negative territory.
–Reuters opinion piece says that the dramatic improvement in the deficit makes political cooperation on difficult structural problems even more unlikely.  However, plans are still floated.  For example, (HuffPost), “The plan sponsored by Sen. Kirsten Gillibrand (D-N.Y.) would force the U.S. Secretary of Education to automatically refinance most government [student] loans carrying interest rates above 4 percent into fixed, 4-percent loans. Roughly nine of 10 federally-backed loans would be affected, saving nearly 37 million borrowers billions of dollars in annual interest payments.”  We’ll see if this idea has legs by watching whether Sallie Mae (SLM) pulls back from multi-year high set Friday…

May 17. Move to higher yields reverses abruptly

–Yesterday’s economic news was decidedly soft with Jobless Claims up, Philly Fed -5.2 and CPI -0.4 with Core only +0.1.  However, it took comments late in the day from SF Fed’s Williams to cause a downturn in stocks, saying that the Fed may reduce bond buying by this summer.
–This morning the dollar is stronger, Aussie at new low.  Precious metals slightly lower, but stocks are again edging higher!
–Interest rate futures reversed much of the bearishness of the past 2 weeks.  Curve flattened aggressively, implied vol was sucked out.  TYM traded nearly to 50% retrace of May’s sell off, 5′s got to around 38% retrace.  Bill Gross says bond bull market probably ended with the end of April: http://www.bloomberg.com/news/2013-05-16/gross-says-bond-bull-market-probably-ended-april-29.html
–Today’s news includes Consumer Sentiment expected 76.4 and Leading Indicators expected +0.3.  Bernanke speaks Saturday:  The title of his speech is “Economic Prospects for the Long Run”.  And he appears Wednesday in front of the Joint Econ Committee; FOMC minutes also released Wed.
–Reuters has an item about the ECB using upcoming regulatory powers to discipline or close problem banks. “Central banks provide liquidity against collateral. But what do you do for addicted banks?” said one person familiar with ECB thinking. “If a bank returns continuously to get liquidity, (the ECB) will make it more difficult. You will have to pay a higher price. You will have to change the rules for provision of liquidity.” http://www.reuters.com/article/2013/05/17/us-ecb-banks-support-idUSBRE94G05020130517
There is an additional story about a troubled Austrian bank where losses will be taken either by taxpayers or by a bad bank, funded in part by capital provided by healthier lenders, (who are balking at the plan). http://www.reuters.com/article/2013/05/15/austria-eu-hypo-idUSL6N0DW28Y20130515
–Are depositor bail-ins about to return to the headlines?

–And finally, here’s a story about a future soybean options trader: http://ca.news.yahoo.com/blogs/good-news/autistic-teen-may-smarter-einstein-163701084.html

May 13. US rates jump Friday, Japan yields surging

–US rates jumped Friday on big volume, with tens up 9 bps to 1.90. Curve made new highs.  2/10 rose a bit over 7 bps to 166 and red/gold euro$ pack spread was up a stunning 12.5 bps to 171. The rumored Hilsenrath tapering article came out late Friday: Fed Maps Exit From Stimulus.  Now we can interpret what the Fed meant by saying it might increase or reduce QE, a heavy tilt toward the latter.  What’s somewhat surprising about Friday’s sell off is change in open interest.  While huge volume would suggest new entrants on the short side, tens registered an increase of only  1300 contracts, while five yr open interest actually fell 40k and bonds were down 17k.  More suggestive of long liquidation rather than a change of trend?  However, euro$’s were up 46k, mostly in greens, and implied vol rose smartly, indicating fear to the downside. Given that even junk bonds recently fell below 5% yield, it’s safe to say that everyone who wanted/needed to chase those few extra basis points got them, and are now looking around to see that no one else is behind them.  Just like Will Ferrell streaking in Old School.
–The G7′s green light for Japanese devaluation saw JGB yields leap higher, now at 78 bps (up 9). A pullback in US stimulus while the ECB is following Japan’s lead is a positive for the dollar and probably not so supportive of US stocks.
–Retail Sales today expected -0.3 from -0.4 last.  Less autos and gas expected +0.4.

May 10. All about yen

–$/yen burst through 100 yesterday and quickly surged to a new high at 100.60, and is now 101.20 as G7 meets. Japanese ten year jumped 11 bps to 70, a huge percentage yield increase. As Japanese investors move abroad for bond investments, funding the gov’t will become a problem for Japan.  US rates also moved higher yesterday amid broad based dollar strength, with curve steepening to new recent highs, though just barely.  This morning TYM is testing support at 38% retrace level of March low to the high in the beginning of May, 132-12.
–Interesting to note that the proxy for yield in the stock market, the Dow Utilities Index, also put in a top right in the beginning of this month, and has fallen nearly 5% since then (in only 7 trading days).  As mentioned previously, the Utilities responded even more strongly than the SPX on the run-up from mid-November associated with yen weakness, with DJUI +23% and SPX +18%.  Now we are seeing a divergence; with a new low in yen, Utilities are falling while SPX squeaks out new highs.
–While there were violent moves in FX, implied vol in rates was once again lower.  The longest dated euro$ straddle EDH16 with 34 months left until expiry, was trading 89 a few weeks ago, now down to 82.5 (the 9900 strike).
–There was a rumor yesterday that Hilsenrath of WSJ was writing a piece about QE tapering sooner rather than later.  That same paper notes the decline in the deficit in today’s issue.  With reduced borrowing needs, QE will take a larger percentage of treasury issuance…perhaps a reduction in QE is getting closer…
–Today Bernanke speaks at 9:30.
–Another 180k of the red midcurve/green midcurve put spread was added yesterday.  I have heard various stories about this position being a hedge against another position.  Not sure about that, but it does remind me of an old euro$ pit story.  Wayne Friedman (FO) had bought a bunch of low delta calls from a local (was it Pat Sullivan?) and wanted to bust the trade a couple of minutes afterward, perhaps due to a desk error.  The market maker said he couldn’t, he had already bought something against them (as a hedge).  Wayne says “What?” Market maker, “A new jaguar”

May 8. Skeptical undertone in the markets

–The Fed’s QE in support of asset prices is supposed to lead to increased confidence and “escape velocity” in the economy, or at least that’s what is hoped.  However, skepticism, rather than confidence, seems more prevalent. “Much of the market’s gains in the past few years have been due to the Federal Reserve making money cheap and keeping interest rates low, forcing investors into riskier assets like stocks.” This line is from a HuffPost article; it has become common knowledge. But there’s an implied addendum: ‘what happens if the Fed stops?’.  I saw sev’l headlines this morning saying China’s Trade Growth Accelerates, yet every article including WSJ, RTRS and BBG said that analysts doubt the veracity of the data.  US Consumer Credit was released yesterday, weaker than expected at $8B, but the trend continues: almost all growth in consumer credit is non-revolving, which is to say student loans and autos.  It’s simply not a picture of broad based confidence, even with Dow 15000.
–From a BBG article: “Fear is big business nowadays,” Hussein said. “People buy the guns because they’re afraid. People buy the guns because they want to scare others. We’re in a jungle now.” You might think that the story is about the US, where gun sales have soared, but no, this article is about collapsing investment in Egypt.  http://www.bloomberg.com/news/2013-05-07/egypt-investment-collapses-as-violence-sparks-lawless-vigilantes.html
–Today’s US news includes comments by Jeremy Stein who has recently cautioned about credit overheating, and the ten year auction.
–Big trade in euro$ options yesterday, steepener of red/green March. Sold 100k 0EH 9925/9900ps 2.5s (12d) and bought 2EH 9875/9825ps 7.5s (18d), all at a price of 5.0.  Red/Grn March futures spread unchanged at 43.5, though there was some liquidation of other year spreads, including sales of Grn/Blu June at 50.0

May 7. RBA cuts rates. US 3 year auction

–Very quiet session Monday, though there was grudging downside follow through from Friday’s employment sell off.  Red/gold euro$ pack spread settled at new high just above 158.5, up 2.625 bps on the day.  Ten year note gained almost 3 bps to 1.769, with TYM 132-215 settle, though it is approaching levels that should provide strong support. (Charts below).
–Australia cut rates by 25 bps to 2.75%.  Aussie dollar making new recent low.  Today’s US news includes three year auction, followed by 10′s and bonds Wed and Thursday.
–EDM15/M16 one year spread notched a new closing high of 50.  Large long position from 46 to 47.5.
–The Fed’s Jeremy Stein listed on BBG calendar as a speaker tomorrow at a panel discussing ‘dollar funding and lending at global banks’. Possibly important if he follows up on his early Feb speech regarding overheating in credit markets.  From Feb 7, “…my reading of the evidence is that we are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit.”  If anything that pattern has become even more apparent.

http://www.federalreserve.gov/newsevents/speech/stein20130207a.pdf

–And, to the prosaic…”The recession caused more car owners to fix and maintain their own vehicles, according to repair site AutoMD. The 2013 DIY Report from the “free online automotive repair resource” found that the number of people tackling do-it-yourself auto repairs hasn’t dropped this year, even though the economy is on the rebound.

–Below is a chart (from late Monday) TYM contract.  The level 132-11 looks to be good support: it is 38% retrace from early March low to last week’s high.  It is the low subsequent to the April 5 employment report (red circle on the right, lows of 132-11 and 132-105) and it is the high at the end of March, a few days after the Cyprus deposit grab news.  Below that is a yield chart of ten year note; 38% retracement there is 1.79%.  $/Val bp in tens is around $81.50 in the TY contract.

 

May 6. Bonds reject the highs as improvement in employment tempers bond bulls

–Massive bond sell off Friday, on NFP of 165k.  Though somewhat stronger than expected, the details of the employment report were not particularly robust, for example there was a large gain in working “part time for economic reasons”.  According to Peter Schiff fast food restaurants have cut previously full time workers to below 30 hours to avoid Obamacare, and hired other part-timers to fill the slots.
–Tens rose 11 bps to 1.74%.  Curve steepened hard, with 2/10 up 9.5 to 152.4 and red/gold +14.25 to over 156.  Trade appeared to be primarily long liquidation as open interest in euro$’s, 2′s, 5′s, bonds and ultras all declined, though tens rose.  Equities surged to new highs.
–The bounce in the curve and reversal in rates suggests bond highs are in place for the time being.  2/10 had traded all the way from 180 in the early part of March to 143 on Thursday, nearly 40 bps.  Likely in a range from 145 to 165 going forward.
–From the Telegraph: “Oskar Lafontaine, the German finance minister who launched the euro, has called for a break-up of the single currency to let southern Europe recover, warning that the current course is “leading to disaster”.
http://www.telegraph.co.uk/finance/financialcrisis/10039329/German-euro-founder-calls-for-catastrophic-currency-to-be-broken-up.html
–There appears to be more uncertainty in the market and much broader acceptance of the Fed’s role in pumping up asset prices, even on CNBC. From an El-Erian speech: “Ride the central bank wave. The more intervention done by one Central Bank forces other countries to do more. The Fed forced Japan into its policy shift. Japan has now forced the ECB to move further.” Further in the speech: “…do not give up liquidity cheaply. In the world today it is very binary.   It will either end well, or very badly, with no middle ground. Optionality and liquidity is the key to surviving and profiting from a binary world.”  http://www.zerohedge.com/news/2013-05-04/mohamed-el-erian-putting-it-all-together

May 3. NFP Friday

–Employment report today with NFP expected 140k  Copper having a strong rebound this morning, up 10 cents.  Spanish tens below 4%. EU lowered forecasts for growth.
–German bund futures exploded to a new high yesterday above 147, as Draghi said the ECB had an open mind regarding negative deposit rates.  Bund yield hit 1.16%.
–US rates fell marginally as well, with tens at 163.  Curve made a new low with 2/10 at 143.  Stocks bounced as financial assets are chased; IBM was able to sell 7 year debt at 1.625.
–Financier Ron Perelman was on CNBC yesterday morning and encapsulated the current environment when asked about the companies he owns (paraphrasing) ‘no top line revenue growth, for example Revlon has something like 2-3% and that’s the best one.  We see only 0-2% gains in revenue but have been very good at controlling expenses.  No increases in employment.’
–Several analysts and news sources yesterday highlighted the extreme level of NYSE margin levels.  Last couple of times margin debt has been this high stocks have had large sell offs.

http://www.bloomberg.com/news/2013-05-02/near-record-nyse-margin-debt-leads-to-caution-chart-of-the-day.html

–Additional US news includes non-mfg ISM and Factory Orders.

May 2. Little reaction to FOMC, ECB today.

–The FOMC caused little market movement though the statement cited fiscal policy as restrictive and said QE may be either reduced or increased. I read the latter as the Fed preparing markets for a change in amount, but lean towards less QE.  The WSJ and FT chose to emphasize the idea of more QE.  I’m sure the Fed wants to send that message to the politicians: “you have shirked responsible budget decisions by default, so we’ll reward your well-heeled constituents by pumping more money into the system so that stocks and other risk assets levitate.” Maybe.
–While it is clear that growth is slowing (or stopped), Fed members have more recently focused on risks of unbridled QE.  In terms of depressed growth, yesterday’s ISM employment component at 50.2 was as low as it has been any time since late 2009.  Business Insider post from today: Public Spending On Construction Hits Its Lowest Levels Since 2001. www.businessinsider.com/the-incredible-decline-of-public-construction-spending-2013-5#ixzz2S80OrKcB  Copper’s price action reflects slowdown, falling around 10 cents yesterday to a new low, now nearing $3.  Oil also had a large drop (though not to new lows).
–There was a large bearish trade in EEM (Emerging Mkt ETF), a buyer of 240k May 42.5 puts for 0.42.  These puts are near 50 delta, avg volume in EEM is around 50m shares, this trade alone is equivalent to a sale of 10m shares.
–ECB this morning, cut expected.  France sold 10′s at record low 1.81%.  Eurozone PMI showed mixed improvement, though Germany fell to 48.1 from 49.
–US interest rates did fall somewhat yesterday, with new lows in the curve.  2/10 fell 3 bps to 143.6.  Red euro$ pack to all deferred contracts either thru or near recent lows.  However, there was a large option put spread spread fading the move: +50k EDH6 9900/9875ps to sell EDH5 9950/9925ps for 2.0 debit.
–US news includes Trade deficit, expected 42.5B and Jobless Claims 345k

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