Jan 11, 2018. China threat

–Story of the day was an article citing Chinese officials: considering slowing or halting purchases of US treasuries.  An already weak market quickly reacted, with a jump to higher yields.  The high in the US ten year in 2017 was 262.7, and shortly after the China article came out, the yield touched 259.5 (which was +5.5 from Tues close).  Given this relatively juicy recent yield, the ten year auction was well received, going off at 257.9 on strong bid to cover of 2.69.  I would further add that in the big picture, China’s foreign reserves hit $4 trillion in 2014, growing in the previous several years as the yuan weakened.  From the middle of 2014 to the beginning of 2017, reserves declined to just $3 trillion.  If there was ever a time to be concerned about the lack of Chinese buying it was over that period.  Since then, the yuan has strengthened, and China’s reserves slowly grown to $3.14T.  The main point: the Chinese warning is likely just a Trumpian negotiating tactic.  It’s like the US pulling out of NAFTA; we’ve shifted to a world of big threats that are usually softened over time.  However, the decline in marginal buying of bonds by the Fed, ECB and BoJ is still a driving factor in the big picture, and the net effect is bearish.

–No surprises from Fed speakers.  Evans wanted to keep rates on hold.  Bullard said that oil may lift inflation expectations. Duh. This morning Feb WTI is nearing $64/bbl.  I would also note that the NY Fed’s Underlying Inflation Gauge for November was 2.95%.  Perhaps Friday’s inflation release is a bit more important than usual.  Today PPI is released, expected +0.2 headline and core, along with Jobless Claims.  30 yr auction in the afternoon.Also, NY Fed President Dudley speaks on the economic outlook at 3:30 EST.

–By the end of the day early weakness in rate futures reversed due to heavy buying, with some well timed exits of structural shorts.  Yields and vol were barely changed after the morning jolt from China.  April Ten-yr 122.5 straddle sold at 1’42 early, settled 1’39.

Posted on January 11, 2018 at 5:17 am by alexmanzara · Permalink
In: Eurodollar Options

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