May 7. Stein talks about volatility associated with Fed’s communication; Yellen speaks today
–Theme yesterday was dominated by put selling that appeared to be mostly position exits. For example, 30k Blue July 9687 puts were sold at 6.0. Curve had a flattening tendency as stocks gave ground. Red/gold pack spread made a new low at 244 (-3.625 on the day, and as low as it has been since last June), as buying continues at the long end of the treasury market. Large buyer of TYM 124.5/125/125.5 c fly appeared to be a roll up of a short call spread.
–Yellen speaks before Congress this morning, which will be followed by the ten year auction (current ten year ended just below 260 yield). Outgoing Fed governor Stein addressed market volatility with respect to Fed actions, but said “We are currently in a very good position with respect to the market’s expectations for our asset purchases”. Another interesting quote, especially given Yellen’s speech today: “There is always a temptation for the central bank to speak in a whisper, because anything that gets said reverberates so loudly in markets. But the softer it talks, the more the market leans in to hear better and, thus, the more the whisper gets amplified. So efforts to overly manage the market volatility associated with our communications may ultimately be self-defeating.” I would expect Yellen to continue to whisper about the weaker aspects of the employment situation in the wake of last Friday’s 6.3% rate.
–Factors outside of the Fed’s control can also exert a huge influence on the markets. For example, Japan stocks were down nearly 3% today. Geopolitical tensions in Asia are on the rise, as Vietnam objects to a Chinese oil rig in disputed waters. As the quest for natural resources increases the chance of a military flare up in Asian seas increases.
