WE NEED RATE CUTS! (at least that’s the message from the markets)
March 26, 2019
–Rate futures and vol exploded Monday, with the red euro$ pack (2nd year forward) up another 11.25 bps, leading the surge. The ten year yield fell 4 bps to 2.414%. All near euro$ calendars made new lows, with front EDM9/EDU9 three month spread at -12.0. The lowest one-year calendar is the front EDM9/EDM0, which plunged 7.5 to settle at -41.5, and traded as low as -45, nearly projecting two eases. TYM atm straddle went from 1’28 to 1’38. On Friday 0EM 9775 atm straddle settled 24.5 and yesterday the atm 9787^ settled 28.5. The peak euro$ contract is EDH21, two years forward, at a price of 9798.5, just over 2%, and that’s with current 3-month libor at 2.60ish. January 2020 fed funds settled 9789.0, a rate that’s 28 bps lower than the current Fed effective. This contract is now projecting more than one ease this year. The question is WHY? Clearly the market was leaning off-sides. The price action is similar to the early January panic spike higher, but it has become broader based and more aggressive. Recall that the most negative one-year ED spread in Jan was -29 and the ten year yield held just above 2.50%. Now -41.5 and 2.414%. The interest rate markets are projecting deep economic malaise which has somehow escaped the notice of the stock market.
–On a technical basis, the 50% retracement level in tens, from the 2016 low yield of 1.36% to the 2018 high of 3.24% is 2.30% which equates to TYM around 125-07/08.
–Interesting note on WeWork yesterday which released revenues. The company’s model is to lease office space, provide shared services like beer, and re-lease the space on shorter terms. Classic borrow short and lend long. According to an article on ZH, revenue surged to $1.8 billion with an associated loss of $1.9 billion. That’s a lot of beer. Softbank is providing the largesse, subsidizing tenants with hugely negative cash flows.
–2yr auction today.
