April 23. Liquidity, or…more debt for old debt
-Yields rose yesterday as the ECB threw a lifeline to Greek banks with a 1.5b increase in the ELA, which stand for Emergency Liquidity Assistance. US ten year note moved in sympathy with bunds, threatening 2%; closed at 197.3, up 6 bps. The curve steepened with 2/10 posting a modest new high of 142.8 (+3.8) and red/gold euro$ pack spread up 4.625 to 118.375. The low of this year in red/gold is 103.75 which was in late March.
–Draghi is doing what he can to keep Greece in the fold and prevent the financial fall out of an exit, but the political side of the equation is much more stubborn.
–HSBC China mfg PMI came out lower than expected at 49.2, but China has already taken steps to generously increase liquidity and move rates lower, with more likely on the way, as it too, has a debt overhang. Since the beginning of March the 7-day repo rate in China has fallen from nearly 5% to 2.5%. So, China and the ECB are both continuing monetary stimulus and the US is standing against the tide. But really, just standing pat is probably all that’s necessary. However, there are still trades being placed for the possibility of a June rate hike, for example a large buyer late yesterday of EDN (July) 9937/9925 put spreads vs EDU5 9975 call…traded 30k, paid 0.5 for the put spread. More on that later…
–May treasury options expire tomorrow. On Wednesday the May 129.5 straddle settled 29, but with yesterday’s move below the 129 strike that straddle settled 45 (futures down 16/32s or 32/64’s). Even though the week has been fairly quiet in terms of news, there’s still a chance of decent movement…
