May 10. The road to deflation
–Once again all eurodollar calendar spreads settled at new lows. Red/gold pack spread was down 2 to just under 152. Red/green at just 30 bps. 2/10 treasury to 157 despite ten year auction. 30 yr bonds auctioned today.
–There was significant early buying of eurodollar straddles that fizzled by days end. For example, EDU 9950^ traded up to 16.5, but settled 14. EDZ2 9950^ traded 20.5 but settled 19.5. EDM2 9950^ traded 7 but settled 5.5.
–EDU12/EDU13 spread was as low as 4 bps before coming back to settle 6.
–Today’s news includes Trade deficit expected -49.5b, Jobless Claims expected 366k.
–I saw a piece written by Pat Buchanan about the rise of nationalism across the globe. On a longer time frame I think the impact on int’l trade has to be negative. I think the recent decline in the price of oil underscores this idea. The question now is how central banks respond, and if new financial measures will bolster asset prices. Will the Fed’s new QE program be sterilized? Will the Fed further cut the swap rate to the ECB? By funding nationalized banks, (like Bankia), is the ECB funding sovereign states, and should the US Fed be involved in such programs?
–The world is likely on the verge of a massive deflationary shock. Central banks have attempted to forestall the event with cross holdings and balance sheet expansion but each new program has a shorter shelf life.
