June 11. On the verge of higher yields? Higher energy prices? Both?
–Yields have continued to press higher since the end of last month, for example EDU6 traded 9845 at its high on 29-May, and settled 9838.5; so in 8 trading sessions we’re down fully 24 bps on settlement basis to 9814.5. Ten year yield gained another 2.5 to 263.5. There’s a good piece on ZeroHedge from Citi’s Technical group that makes a case for higher rates and mentions 280 as a level of resistance…that’s about 1 1/4 points from here in TYU contract, or 122-24. There was heavy (new) buying yesterday of TYQ 124/123/122p fly and 123.5/122.5/121.5p fly (as pkg for 21/64’s), appears to target this yield level. Closer in on the curve we still see green euro$ pack leading the way down, along with 5’s on the treasury curve. Green pack -3.25 yest, while golds were -1.625. 5/30 treasury spread notched down to 176, closing in on 170, the low from early May. I would also note a marginal new high on the near EDZ14/EDZ15 one year calendar spread, up 2.5 to 74 bps. The market is gently urging short rate “normalization”, but it will probably only force further flattening in the long end.
http://www.zerohedge.com/news/2014-06-10/1994-2004-2014-bounce-yields-start-something-bigger
–While data has improved- ISM strong and yesterday’s NFIB optimism index reached highest since late 2007- there are still plenty of reasons yields may be restrained on the upside. For example, I marked bund/ten yr treasury spread at 124 bps, a new high for the past 5 years. The last time it was near this level was mid-2009, of course yields on both instruments subsequently fell in that instance. This time one might expect both bond yields to move higher, especially as the ECB looks to depreciate the euro, however, a weaker yen hasn’t led to higher JGB yields…
–The other thing worth a mention is that crude oil continues to moves higher and there are reports that al-qaeda has overrun Iraq’s second largest city to the north, Mosul. I am actually surprised oil isn’t higher. Recall that in 2007 and early 2008 the surge in oil prices to $140 was an important aspect to the financial crisis. I don’t know what will happen this time around, but with winter only 7 months away and europe already on the edge with regard to Russia’s Nat Gas supplies, the energy complex could get a bit more, well, complex.
