Sept 23. It’s deja vu all over again
–Yields have resumed their downside trend, with tens falling 8.5 bps yesterday to 212.3. Near one-year eurodollar calendars made new lows, with the peak one-year spread, now June’16/June’17, at just 62 bps, down 3 on the day. Red/green euro$ pack spread (2nd to 3rd years) is sitting right on its low, just over 50 bps. Sliding equities were the main catalyst yesterday. Underscoring international concerns, the Brazilian real breached 4.0 yesterday; continued weakness with a surge in CDS. Also, China’s PMI was released today, coming in at only 47 vs expected 47.5. Wait until Xi gets home.
–Yellen is speaking Thursday afternoon (5:00 EST) on Inflation Dynamics and Monetary Policy, though openly discordant opinions on direction of policy have led many commentators to conclude that the Fed’s communication policy is in tatters. However, the market is pretty certain that the Fed has more or less been iced in terms of near term rate increases. April 2016 FF settled 9965.5, or just 34.5 bps, indicating just one hike over the next 4 FOMC meetings. There was a seller of 25k EDH6 9950 straddle with the 9925 put yesterday (new position) at 19.5, essentially reflecting the same view…perhaps one hike before the spring.
–I use a quick and dirty proxy for junk bond spreads, using the yields associated with the heavily traded etfs HYG and JNK vs the five year treasury yield, and I marked the spread yesterday at a new high, up over 11 bps on the day. I average the yield on the two etfs and subtract the five year. Again, not exactly scientific, but probably a reasonable indicator of increasing credit stress. As Yogi Berra would say, “You can observe a lot by just watching.”
–Yellen is speaking Thursday afternoon (5:00 EST) on Inflation Dynamics and Monetary Policy, though openly discordant opinions on direction of policy have led many commentators to conclude that the Fed’s communication policy is in tatters. However, the market is pretty certain that the Fed has more or less been iced in terms of near term rate increases. April 2016 FF settled 9965.5, or just 34.5 bps, indicating just one hike over the next 4 FOMC meetings. There was a seller of 25k EDH6 9950 straddle with the 9925 put yesterday (new position) at 19.5, essentially reflecting the same view…perhaps one hike before the spring.
–I use a quick and dirty proxy for junk bond spreads, using the yields associated with the heavily traded etfs HYG and JNK vs the five year treasury yield, and I marked the spread yesterday at a new high, up over 11 bps on the day. I average the yield on the two etfs and subtract the five year. Again, not exactly scientific, but probably a reasonable indicator of increasing credit stress. As Yogi Berra would say, “You can observe a lot by just watching.”
