Feb 18
Even before the Fed minutes were released there was pressure on interest rate futures, which accelerated into the end of the day. Fed staff raised growth estimates; there’s a general shift toward less accommodation and the possibility of asset sales by the Fed.
–The curve steepened to new highs with 2/10 spread at 289 and red/gold pack spread at 286, up over 5 bps on the day. Last June when 2/10 was around 275 (highest of last year), the ten year treasury/tip spread was 200 as opposed to current 230 bps, so market signals of inflationary concerns seem to be growing. These signs can sometimes take a very long time to play out, as was evident when the curve had last inverted and economic weakness followed with a significant lag.
–Though the market was bearish yesterday, there are still buyers of small calls along the curve. Yesterday TYM 123.5 c were bought for 4 in 10k, bringing total to 60k. EOH 9900c were bought for 1.0, 15k. EOZ 9900c 2.5 paid for 20k. All new longs (or adding). These trades might be more geared to disaster protection rather than economic weakness.
–In my opinion, a back up in yields on the long end will likely be temporary, as higher mortgage rates will expose further cracks in both residential and commerical real estate, but short term data has potential to cause further selling.
