April 8. New lows in the yen…Japanese investors search for safer yields

–Normally when one thinks of “hot money” flows, it’s in conjunction with emerging economies that become overwhelmed and destabilized. But given uncertainties in the EU, the overt goal of Japan to depreciate the yen (‘smashing’ success), and N Korean belligerence, US capital markets are the “beneficiaries” of internat’l capital. Even without a weaker than expected employment report US treasury yields might have fallen; Friday saw a new recent low in tens at 1.69%, down nearly 7 bps. The curve flattened to new lows with red/gold euro$ pack spread down 4.75 to below 148.  Implied vol was sucked out with long dated green euro$ straddles losing a couple of bps.
–From Mauldin, “Thus, any Japanese household (and Japanese households are the most liquid-asset rich in the world) has to be thinking of putting some of the US $9trn currently sitting in cash into other currencies. And every hedge fund has to be wondering why they should not sell 10 year JGBs yielding 40bps in a falling currency, and then buy US, UK or French bonds yielding 1.75 to 2%.”
–In spite of the relative attractiveness of US assets, SPX had an outside week and closed lower, as did Nasdaq, but SPX had made a new high for the move.  Though it seems that stock market moves have little to do with macro growth trends, it’s worth noting comments by the NY Fed’s Dudley:  “The increase in payroll tax, the rise in high income tax rates, the increases in taxes associated with the Affordable Care Act, and now the sequester—-if sustained—-will result in fiscal drag of about 1 ¾ percentage points of GDP in 2013….in an ideal world, fiscal policy would have broad-based bipartisan support.  That would reduce uncertainty and reassure households and businesses that the U.S was on a sustainable long-term path.  Instead, we have nearly the opposite:  significant retrenchment in the near-term, but no credible action over the long-term, with partisan divisions and significant uncertainty about what will happen next.”

Posted on April 8, 2013 at 9:19 am by alexmanzara · Permalink
In: Eurodollar Options

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