April 23. Belly of the curve remains pressured; new lows 5/30 spread

–Once again red/green eurodollar pack spread made a new high, +1 to 118, as greens remain the weakest part of the curve.  Green June at 9825 is near the low print made on the March FOMC meeting, which was 9821.5. However, 5/30 treasury spread at that time was around 197, and is now just 176 as back end strength continues.  I’ve heard several reasons for the flattener, including steepener unwinds, demand for long bonds from German lifers, etc, but there’s an interesting piece on ZH from Scotiabank that suggests a rotation from stocks into bonds as private pensions have become close to fully funded, having been forced to reach for risk in equities after the crash, but now looking to simply match assets and liabilities.  ” There are around $16 trillion in corporate pension assets in the US of which approximately 43% are Defined Benefit plans. Many of these plans were materially underfunded (more liabilities than assets) after the 2008 crises. However, after years of QE and resulting asset price inflation, a large portion of these funds have returned to near fully-funded status (97% levels on average according to most estimates).  …plans have adopted policies that systematically reduce investment risk as funded status improves. The rationale is quite simply that the cost/benefit equation changes as the plans’ funding status improves.”  http://www.zerohedge.com/news/2014-04-22/here-comes-next-great-rotation-out-stocks-and-bonds
–While greens and the five year note continue to be pressured, implied vol in treasuries is still subdued, with tens at 4.5 and fives still below 3% at 2.9.  There is no evidence of reaching for puts, though there was some new buying of both Short (red) June 9937p for 4, and Short July 9912p for 9 (open interest +19k).
–Five year auction today.  China HSBC/PMI released at 48.3, about as expected but still indicative of contraction.

Posted on April 23, 2014 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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