April 9. Japan’s increase in QE doing Fed’s heavy lifting; US can taper off QE…

–US interest rate futures fell yesterday and the curve steepened, erasing Friday’s move to new lows.  Dollar/yen was the star performer, exploding to a high of 9937, nearing 50% of the last large leg down from 2007 high of 123.95 to the 2011 low of 75.35 (99.65).  Ten year swap spread posted a new high of 19 as treasury outperformance continues (spread was around 8-10 in mid March); Japanese investors are thought to be pouring into non-yen bond markets.
–Auctions this week of 3’s, 10’s, 30’s; begins with 3yr today.  NFIB small business optimism data (or lack thereof) is also today.  FOMC minutes are tomorrow.  Cleveland’s Pianalto yesterday joined others in calling for less QE: “Slowing the pace of purchases could help minimize the potential risks associated with our large and growing balance sheet”, and BlackRock is also asking the Fed to “rein in” QE (FT).
–N Korea is warning foreigners to leave S Korea as the possibility of a missile launch looms.  In addition to risks of conventional war, a new cyberwar document came out last week: The Tallinn Manual.  From a Der Spiegel article: “Benzel’s voice doesn’t falter when she describes a war scenario she calls “Cyber Pearl Harbor.” This is what it could look like: “Prolonged power outages, a collapse of the power grid and irreparable disruptions in the Internet.” Suddenly, food would not reach stores in time and cash machines would stop dispensing money. “Everything depends on computers nowadays, even the delivery of rolls to the baker around the corner,” she says.”  This manual attempts to distinguish when cyber attacks go from commercial nuisances to acts of war.  Interesting read (thanks YZ)
–China’s inflation reportedly slowing to 2.1%.  However, China’s data is a bit murky, as outlined in this Reuters story about off balance sheet lending: http://www.reuters.com/article/2013/04/08/us-china-banks-shadow-risk-idUSBRE93705F20130408
No way to quantify the magnitude of bad loans, but the article notes that dubious loans made to businesses and local gov’ts that can’t be serviced are being taken by Trust companies, which wrap them up in what are called “Wealth Management Products” or WMPs, and sold to investors, thus allowing bad economic actors to roll their debt.  The sh*t always seems like it’s wrapped up in a three letter acronym, like SIV’s, etc. “Trust companies and brokerages probably aren’t buying many bad loans directly, analysts and industry executives say, but they have become a vital source of credit, allowing banks to arrange off-balance-sheet refinancing for maturing loans that risky borrowers cannot repay from their internal cash flow.”  “Trust companies sell wealth management products (WMP) to raise funds so they can purchase loans that banks want off their books. WMPs are then marketed through bank branches as a higher-yielding alternative to traditional bank deposits.”

Posted on April 9, 2013 at 5:25 am by alexmanzara · Permalink
In: Eurodollar Options

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