Oct 4. No employment report. Watch for front end scare if Stein gets misinterpreted
–No employment report today due to gov’t closure. However there will be several Fed speakers including Fisher, Stein, Lacker and Kocherlakota. Stein is speaking on tri-party repos, which will likely become the primary policy tool for setting short term rates (now in testing phase until January). Dudley has explained previously that Fed’s current testing of tri-party repos doesn’t signal any imminent change in short term rates, but suspicions linger. I would note that there has been some buying of EDZ puts, and of course of 9975 calls as libor setting has slipped below 1/4%, so front end vol has firmed slightly.
–New lows in some of the calendar spreads yesterday, notably red/green pack spread which eased 1.625 bps to 86.5. High of the year has been around 109 in mid September as contracts changed. In April before tightening fears gripped the market it averaged around 30 bps.
–New high in 5/30 treasury spread which I marked at 234, as 5 yr yield slipped just over 2 bps to 1.362.
–Weekend risk is that some agreement is hammered out on the debt ceiling, which would likely cause fixed income to sell off and stocks to rise.
