Rory. He’s not to be underestimated

August 8, 2019

–Amazing market action so far this week.  The thirty year bond neared its all time low yield at 2.10% having traded 2.14 (at futures settlement it was 2.19%).  The ten year note ended the day at 1.682%, down 5. bps on the day.  The two year swap spread went negative by a couple of bps, meaning that the supposedly safest security in the world had a higher yield than the two-year swap. By the way in 2008 this spread was 140 bps, and as recently as last year was above 30.   In recent cycles, the at-the-money ten year straddle would trade around 1 point with five weeks until expiration.  Yesterday, with two and a half weeks until expiry, TYU9 130.25 straddle settled 1’14.  Crude oil was crushed yesterday, settling down 2.54 at 51.09, though it has rebounded today as the Saudis vowed to stem the price decline.  Stocks took a hard early spill but fought back the rest of the day and are building on gains this morning.  Trump once again tweeted that the Fed should admit its mistake and cut rates, essentially pouring gas on the currency wars.. Chicago’s Evans got the message and said more easing may be warranted due to ‘headwinds’ since the last meeting, WHICH WAS ONLY 8 DAYS AGO. 

 –The eurodollar strip was up 7.5 to 8.25 bps from reds through golds.  The red/green pack spread declined 0.625 to settle exactly flat, i.e the four contract average in the second year forward and the third year forward settled at 98.72875, or right around 1.25%.  That level would be consistent with a Fed Fund target of 1-1.25%.  FOR TWO YEARS.  

–There was an interesting tweet by Mary Childs of the WSJ, citing an article which says that Credit rating firms are giving overly optimistic appraisals as they fight for market share.  Here’s the link. https://www.wsj.com/articles/inflated-bond-ratings-helped-spur-the-financial-crisis-theyre-back-11565194951 I didn’t bother reading it.  What difference does it make?  In a world where the economic signals from interest rates have been eradicated due to central banks, does it make sense to fret about ratings?  The Fed IS ABOUT TO BUY THIS STUFF, LOCK STOCK AND TWO SMOKING BARRELS.  Yeah, it’s hard to understand.

–The press is signaling relief this morning as the yuan setting was better than expected.  It’s still above 7.   

Posted on August 8, 2019 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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