Tipping points

May 9, 2019

–Stocks under renewed pressure this morning with Trump turning up the rhetoric saying China broke its deal.  Treasuries have reversed yesterday’s weakness going into today’s 30 year auction.  News today includes PPI expected +0.2, with yoy Core 2.5%.  Trade deficit $50.1b.  Jobless Claims 220k.

–Yesterday’s 3 month libor setting was 2.545, the lowest since last October and just shy of 29 bps below the high print set just after the December FOMC hike.  While this supported the very near contracts, reds through golds fell 3 to 4 bps.  After an initial push to new highs in TYM9 to 124-06, the market faded going into the ten year auction and declined further in its wake to settle 123-24.  The auction was poorly received with bid to cover of just 2.17, the lowest in a decade, with a tail of 1.4 bps to come in at 2.479 (3:00pm marked 2.482).  Most commentary surrounding this auction expressed concern with lack of foreign demand, with some suggesting that perhaps the prospect of increasing supply had reached a tipping point.  A BBG piece fretted about lack of Chinese participation.  Should that be a surprise?  After the 2008 crisis, the US/China relationship was often referred to as ‘vendor financing’ with China selling the US manufactured goods and recycling those dollars into treasuries.  From the start of 2008 to the middle of 2014, China’s reserves grew from $1.5T to a peak of $4T.  Since 2016 they’ve leveled off just above $3T.  But with less being shipped to the US, there are fewer dollars to recycle into UST.  Who is going to plug the gap?  You guessed it: The Fed. 

–Interesting to note that in this regard, BOJ’s Kuroda dismissed the idea that Japan was a real-life example of MMT.  It seems as if Kuroda equated MMT with the idea of hyper-inflation, but according to Stephanie Kelton, MMT’s main proponent, the point of MMT is to bring down employment and create/repair infrastructure, with an increase in inflation being the limiting factor, rather than a fixed dollar amount of debt.  That is precisely the Japanese story, and it hasn’t sparked inflation.  It’s also ironic that the Fed’s Lael Brainard in a speech yesterday brought up the (Japanese) idea of targeting yields slightly further out the curve.  Yes, the Fed will be on its way to monetizing the debt.https://www.federalreserve.gov/newsevents/speech/brainard20190508a.htm

–Some notable new sales yesterday of TYN 126c at 13 and 14; open interest +11k, settled 9.  Fears of a meltdown associated with a complete breakdown in trade talks just isn’t reflected in markets.  However, it’s also worth keeping an eye on TRY, new low today of 6.23.

Posted on May 9, 2019 at 5:03 am by alexmanzara · Permalink
In: Eurodollar Options

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