Can stocks and bonds go down together? Inconceivable!

–Yields moved higher yesterday in spite of weak economic data and equity prices.  The ten year rose 3.6 bps to 2.686% and the 30y bond closed decisively above 3% at 3.045%, up 4.7 bps.  Curve slightly steeper; 2/30 rose 2 bps to 51.8.  Atlanta Fed’s GDP Now was revised down another tenth to just 1.4% for Q4 2018 on soft durables.  A couple of weeks ago (prior to retail sales) this forecast was over 2.6%.  Philly Fed also disappointed at -4.1 vs expected +14.0.  This morning stocks are buoyed by the prospect of progress on trade as Trump is slated to meet with China’s top negotiator.  Bonds are steady.

–There’s a Reuters article this morning about the Fed’s ‘pivot’ and a ‘new economic reality’.  Nothing really new there, I would only say that US markets remain dependent on juice from either the Fed or from the Federal Govt (tax stimulus plan of 2018).  https://www.reuters.com/article/us-usa-fed-pivot-insight/a-fed-pivot-born-of-volatility-missteps-and-new-economic-reality-idUSKCN1QB0IK

Interestingly, the FT also has a Fed article, ‘Slow-inflation conundrum prompts rethink at the Fed.’  Are these Fed plants, indicating that the old models have less and less value?  Or just news outlets belatedly catching up to the idea of an end to the hiking cycle?  As an aside, note that the ten-year tip inflation breakeven notched a new recent high of 191 bps yesterday.  Maybe inflation is simply stable…

–If there IS a big change, it might be signaled by yesterday’s weakness in both stocks and bonds.  Volume was light, so probably not worth reading too much into it, but there appears to be uneasiness creeping in, that increased treasury supply may not be welcomed as eagerly.  THAT would be a game changer.  

–No news today.  March treasury options expire.  TYH 122 straddle settled 14/64’s yesterday vs 121-29.


–Attached chart is March’21/March’22 spreads in dollars, bor and sterling.  In europe, this area of the curve has been the steepest as the ECB was expected to move toward a hiking cycle.  However, since October that spread has nearly halved, from almost 40 to just above 20.  In the US, the back end of the curve was flat as the US was, in fact, tightening.  The end of December spike in the spread from  -4 to +11 reflected a sharp increase in odds of an ease in response to turmoil.  Interestingly, the back end of the euro$ curve isn’t falling back to previous levels.  Risk/reward favors longs in back euro$ calendars…

Posted on February 22, 2019 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

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