Aug 19.

Aug 19.  Yields once again plunged with the US ten year briefly trading under 2% before ending the day at 2.08, as the world undergoes a crisis of confidence.  European bank stocks are being slammed.  Curve compression is evident in eurodollars as huge buying of blue midcurve calls continues. Red/gold pack spread fell another 7.5 to 199 bps.  EDH14 is the first contract with a yield above 1%.  There is nothing good about a completely flat curve near zero rates.

–Philly Fed was an eye-popping -30.7 vs expectation of +2.  Stocks were crushed with DJIA -3.8% and SPX -4.5%. The Fed has reactivated swap lines to europe; ZH reports the SNB borrowed $200 mln.  While the amount is tiny (so far), the idea of the Fed coming to the rescue of the global system will again engender political attacks. Jackson Hole next week.

–I heard a monetary official respond to the question of whether the world could function on a gold standard, and the shrugged-off response was that ‘there isn’t enough gold’.  In my mind, that’s the same thing as saying there’s not enough gold relative to the massive money stock, or, put another way, that the price of gold is way too low.  (Up $35 yesterday).

–While the “easy” trade is to pour into the safe haven liquidity of treasuries I am starting to think that a true crisis of confidence will also eventually ravage this asset class in the form of much higher yields. The heart of the problem is excessive leverage.  The official response to prevent a negative feedback asset collapse has been expansion of money. A true loss of confidence in monetary institutions which have made dubious private debts public, could result in much higher yields demanded by lenders.

Posted on August 19, 2011 at 12:40 pm by alexmanzara · Permalink
In: Eurodollar Options

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