April 14. Curve flatter despite stock rally
–Although stocks had another strong day, (SPX +1.0%, Hi Yld and EEM at new highs for the year), interest rate futures remain well bid. Economic data yesterday was disappointing, with Retail Sales -0.3% and just +0.1 ex-auto and gas. PPI -0.1%. The euro$ strip ended slightly higher and flatter…once again I would note that essentially all ED one-year calendars are between 22 and 26 bps. Ten year auction was solid at 1.765%, 1.3 bps through the pre-auction level. Even with equity markets retracing all of the year’s early sell off, the curve simply does not have any inclination toward steepening, and in fact the 2/10 treasury spread (101.4 bps) and red/gold ED pack spread (73 bps) are close to the flattest levels they have been since the crisis. Additionally, the 5y5y inflation swap forward has retraced a good part of its recent bounce and, at 200 bps, is at the lowest level of the past seven years, except for spikes lower late last year and in February. Implied vol in treasuries edged to new lows for the year.
–Underlining weakness in Asia, Singapore cut rates. The Atlanta Fed GDP Now estimate for Q1 GDP was revised slightly higher, but is still barely positive at just 0.3. From Reuters: “You can’t create demand from thin air. What’s needed is to create an environment in which companies and households feel confident to spend,” said a senior Japanese policymaker directly involved in Group of 20 negotiations that will continue in Washington this week.
–Interest rate markets do not appear to be endorsing the current central bank induced rally. Relatively heavy debt loads globally require a bit more growth and inflation for sustainability.
