May 6. Bonds still heavy
–US rates continued to rise yesterday with the ten year yield up 4 bps to 217.3, having reached around 220 during the day. While that’s still below the high of the year set on the March employment release of 224, the long bond made a new high for the year at 290.5. Many eurodollar calendar spreads are also posting new recent highs. However, the peak one year spread, Dec’15/Dec’16 is still only 84; at the end of the year the peak one year was over 100 bps. There was an outright heavy seller of June’16 eurodollars yesterday from 98.985 to 98.975; the contract settled -3.5 at 98.95 with a jump of 109k in open interest. –While the press mostly continues to point to the idea of Fed rate hikes as the primary driver, January ’16 Fed Funds were only down 0.5 bp yesterday to 9957, just 30 bps higher in yield than the May contract, so the market is really only anticipating one rate hike and a small chance of another one before the end of the year. The rise in rates is more related to weakness in the dollar and the accelerating rally in crude oil. Uncertainty is rising, as indicated by the jump in implied vol treasuries; I marked July TY vol at 5.9 yesterday, up from 5.1 just last week.
–In terms of economic activity, ZH has this snippet regarding vice spending: “…gaming revenue on the Las Vegas strip fell nearly 10% in March after sliding 4.4% in February.” We know that Q1 was weak, but those are pretty large declines! Also, I didn’t read the story, but saw a headline which says that the City of Chicago is asking the teacher’s union to take a 7% pay cut. And they say Varoufakis is an unreasonable negotiator. Expect another few tenths of a second to be shaved from yellow to red lights, so the city can continue to plug revenue shortfalls with tickets.
