April 5. It’s a write-off

–The very front end of the curve is reflecting better than 50/50 odds for a hike at the June FOMC, with FFN7 unch’d yesterday at 9896.  However, ED calendar spreads continue to make new lows, with EDU7/EDZ7 closing at just 9.5 bps (new low) and the peak one-year spread, June’17/June’18 falling another bp to 43.5, lowest since last December.  The red/green pack spread (2nd to 3rd year) also edged to a new low, closing at 30.625.  So, when Gundlach says “the reflation narrative may be fading”, we don’t need an inside tip from Lacker, the same sentiment is already on view in interest rate futures.

–I’ve mentioned auto sales and loans several times recently, but now I am seeing a lot more about it in the form of strident warnings about the upcoming plunge in used car prices, etc.  While it’s clear the auto industry is downshifting, it’s worth a review of aggregate loans.  According to the Consumer Credit report from the Fed, auto loans outstanding are $1.1 trillion, which is a lot, but student loans are $1.4 trillion, and they are already seeing staggering default rates.  I guess the difference is that the gov’t owns the student debt, and to quote Kramer, “they can write it off”.  By the way, mortgage debt is now $9.75T; in 2007, 08, 09, it was $10.5T.  What has grown is business debt outstanding, $10T in 2007 and $13.5T now.  However, spreads to treasuries remain very tight.  Corp debt as % of GDP is close to a record high.

–Although end of the day vol levels in treasuries were only slightly firmer, there was an early reach for calls.  For example, TYM 128c were heavily bought, open interest increased 22k.  Settled 13/64 with a 14d, ref 125-01.  I reckon that strike will equate to somewhere right around or just under 2% yield on the ten year treasury given yesterday’s close of 2.35%.

–News today includes ADP expected 185k vs 298k last.  Service ISM expected 57.0 and Fed minutes this afternoon.


Posted on April 5, 2017 at 5:22 am by alexmanzara · Permalink
In: Eurodollar Options

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