Oct 10. Short term debt limit increase looks likely
–Obama provided an opening on the debt ceiling impasse with the suggestion of a short-term increase to allow further negotiations and it looks like Republicans are going to crawl through it. Stocks are rebounding and treasuries fading. Tensions in the market were easing yesterday as implied vol slid. For example the Dec bond closed -9 at 133’04 but USZ 133p were unch’d. TYZ straddle went from 2’09 Tuesday to 2’01 yesterday as futures closed unchanged in spite of the ten year auction. 30 yr bonds auctioned today. Jobless Claims will also be released.
–Red/green pack spread made a new monthly low just under 86 bps. Since the beginning of August this spread has been between 80 and 109. Once again I would note it was around 30 in the beginning of May before it started its steady ascent, so in general I would say the market is comfortable with the idea of somewhat less accommodation going forward, in spite of Yellen’s nomination. Ten year inflation-index note yield holding around +45 is another reflection this (had negative real rates in the beginning of the year).
–VIX also was lower on the day. I would anticipate flattening of that curve as the gov’t lurches back into full operation. Even early yesterday we saw a seller of Nov 20/24c spreads vs 16puts at flat; Nov Vix 18.70s.
–In spite of reduced market tensions small business contacts are still uneasy with planning as policy dysfunction continues. Two days ago Gallup noted that their weekly confidence poll dropped the most since Lehman.
