Sept 22. Of zero rates and caipirinhas
–We’re in a bout of ‘risk-off’ this morning with ESZ -30 (1933…a good year) as of this writing. New low in Brazil real (3.985). Other EM currencies also weak, as is copper.
–US yields rose yesterday with considerable emphasis given to Bullard, Lockhart and Williams expressing the need for a rate increase. Yellen has a difficult task in trying to keep the Fed in line. Bullard complained about Cramer constantly cheerleading for zero rates, yet his own outspokenness creates communication issues for the Fed.
–Tens ended up 8 bps (at futures settlement) to 220.8, though the selling yesterday has been almost completely reversed this morning. The curve was steeper with red/gold euro$ pack spread +4 at 133, again, being reversed this morning. Auctions kick off with today’s 2 year.
–While Bullard got all the attention and rates modestly increased, look at some of the trades that actually occurred: Buyer of 20k EDH6 9975c for 0.5 (cover). Buyer of 8k EDU6, Z6 and H7 100c for 1.25 (new). Seller of 15k EDZ5 9950/9962 strangle with an additional 9937p. These guys aren’t listening to Bullard, they’re latching onto to Kocherlakota and the negative dots. “Here’s a good idea: Buy some 100 calls.” Really? By the way, both 1 and 3 month US bills trade negative as well. There is some talk about the possibility of a gov’t shutdown at the end of the month, but in 2013, the bill market didn’t really spike up until the middle of October.
–Note once again that high yield etfs HYG and JNK closed lower yesterday in an up market. As Xi visits the US, there is more talk of bankruptcies in China, with weakness there spilling over internationally (as articulated by several central bank officials recently). Look no farther than Brazil, mentioned at the top of the note. The currency has been cut in half in less than two years. This isn’t Greece, with a $220 billion economy. It’s ten times larger at $2.3 T. Almost makes you feel like having a caipirinha.
