April 5. Lack of QE resolves with lower treasury rates(!) as risk assets fall

April 5. The market continues to attempt to sort out the implications of a Fed less inclined to engage in QE going forward. For the time being the result appears to be a downward adjustment in risk assets, or those assets most boosted by liquidity measures (gold -$50, silver, stocks). And, after an initial hiccup by the long end after Tuesday’s FOMC minutes, a move into the safety of treasuries. Perhaps one small indication of risk aversion is the topping formation in EUR/JPY which has a triple top in late March at 111 and now trades 107.50. (A bounce in yen and a fall in euro relative to $). While there is concern in Germany about inflation, Spain continues to warn about “extreme pressure”. The curve flattened, another “off-risk” signal with 2/10 falling 4 to 189, and red/gold down over 8 bps to 187.5. Interest rate option trade continues to favor steepening strategies and reflects concern about higher treasury rates. But red/gold pack spread can’t seem to break through 200. Perhaps the market doesn’t want to admit it, but the lingering cloud is an addiction to central bank liquidity. The fear is that without Fed buying, yields must go up. I have some sympathy with that view, but what really has tended to happen is that stocks decline and banking (bad asset) pressures build without the drip of CB liquidity. So treasuries rally. If we are truly perceived to be in a ‘self-sustaining’ recovery, then a move to higher rates is likely. It’s not clear yet, and small signals suggest the market has doubts.

Posted on April 5, 2012 at 5:06 am by alexmanzara · Permalink
In: Eurodollar Options

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