June 26. Circle jerk
–Q1 GDP revised much lower to -2.9%, the worst since the crisis. Because it was cold. Yields fell, with tens down 3 bps to just under 255.
–In the last couple of quarterly cycles Green midcurve puts were bought heavily, mostly 9812 and 9825 puts. Late yesterday there was a sale of 20k Green Sept 9825/9887p 1×2 at 8.0 covered 9818.5, which was an exit. Perhaps the GDP data finally convinced some people to take NY Fed Dudley’s advice, and not put too much weight on projected rate hikes in mid-2015
–Today’s news includes Jobless Claims expected 310k. Personal Income and Spending expected +0.4 on both. Seven year auction.
–What has QE and ZIRP done? Created oodles of capital competing for a few extra bps out the curve funded at short term rates near zero. From Reuters: “JPMorgan’s emerging market Asian credit index is trading at a spread of 241 bps over comparable U.S. Treasuries, the narrowest in almost three years. …”The carry that we are getting in markets like Malaysia and Korea, which are relatively lower-yielding markets, is not attractive and not offsetting the duration risk we are holding,”
From BBG: “The yield on Kenya’s 10-year security has fallen 46 basis points to 6.41 percent since being announced on June 16, narrowing the premium over similarly dated U.S. Treasuries by 47 basis points to 381. …“The exceptionally low yields on frontier debt at present are likely to spur potential issuers into action,”
–With Japan at 56 bps for tens, and Germany 127 bps, the US looks darn good at 2 1/2%. Except of course, as compared to Kenya at 6.41. Low yields create premium selling in an attempt to manufacture extra yield performance. So, how does that circle back and affect the man on the street? Well, the Illinois Teacher’s Retirement fund just cut their projected return from 8% to 7.5%. “The lower rate will increase the system’s unfunded liability, which was $54 billion at the end of fiscal 2013…” and the gap falls to the taxpayers. And how does the system get a return of 7.5% with UST at 2.5%? KENYA. There’s your answer. Well technically Kenya PLUS the added 100 bps by selling Sept 2016 euro$ straddles. “But that’s over two years out…” And how do taxpayers make up for the fantasy shortfall of a projected 8% yield vs a fantasy 7.5% return? Chicago Mayor Rahm Emanuel has the answer: a telephone tax. “Emanuel originally wanted to use a property tax increase to come up with the tens of millions of dollars he needs this year to pay for a partial City Hall worker pension fix. On Wednesday, Emanuel formally introduced his alternative, an ordinance to raise monthly 911 charges on wireless phones and land lines by $1.40, to $3.90 for each line. In addition, the charge on prepaid phones would rise by 9 percent.”(Chgo Tribune). And what does that do? Takes money out of the pockets of consumers. Which leads to lower GDP. Which leads to more QE. Which intensifies the search for yield…
