Aug 14. Bund yield on either side of 1%; San Diego discovered by the Germans

–Yields fell yesterday as Carney dialed back the prospect of tightening, tying policy to wage growth. Then US retail sales disappointed, coming in at 0 vs expectations of +0.2.  Tens fell 3 bps to 242.5. Near eurodollar calendar spreads made new lows.  The peak one year spread, Dec’15/Dec’16 fell 2 bps to end at 102 (now the only one-year spread above 100).  This morning weak GDP data in Germany and France caused bunds to dip below 100 bps. Korea cut rates to 2.25% (expected).
–It seems to be an endless cycle of tepid growth and contained wage pressure which combine to snuff out tightening expectations and encourage share buybacks funded with debt.  Other markets are also telegraphing reduced price pressures, with Nov Soybeans at a new low this morning after yesterday’s crop report.  Corn is hovering at the low.  Crude oil is down slightly today, and copper, which had been holding up quite well, fell 3.75 yesterday and is a bit softer currently.  (HGU 310.75, averaged around 324 in July).
–Interesting item in this morning’s WSJ that San Diego County Employee Retirement fund is levering up with the use of derivatives in an effort to increase returns to cover pension shortfalls. http://online.wsj.com/articles/san-diego-pension-dials-up-the-risk-to-combat-a-shortfall-1407974779
As a footnote, in 1994 Orange County went tits up due to its reach for yield using sophisticated financial instruments.  From NYT, “The investments had been made by a county desperate to get additional profits on its investments to pay for government services. But the fund, with about $8 billion invested in it — and with borrowings of about $12 billion — now faces a loss of at least $1.5 billion.”  Recall that 1993 was a year of low rates, with FF pegged at the THEN low rate of 3% for the impossibly long period of of 14 months.  There followed a “reach for yield”.  Aggressive tightening in 1994 caused many financial dislocations, contributing to the Mexican Peso crisis as well.  Stay classy, San Diego…  Ron Burgundy: Discovered by the Germans in 1904, they named it San Diego, which of course in German means a whale’s vagina.

Posted on August 14, 2014 at 5:11 am by alexmanzara · Permalink
In: Eurodollar Options

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