Aug 28. Watch out for falling rates

–New lows in the curve.  Red/gold pack spread fell another 2.375 to just under 192.  2/10 treasury spread 184.7, also down 2 bps as the ten year yield fell 3 to 236.  The peak one-year eurodollar calendar spread is still EDZ15/EDZ16 but it’s now only 101.5, falling 1.5 yesterday.  German ten year yield is down to 90 bps this morning.  US thirty year bond yield at 310 is the lowest level since June 2013.
–There are a lot of stubborn bears in US rates; there is continuous buying of put butterflies in blue eurodollars – yesterday it was 20k Blue Nov 9712/9687/9675p fly bought for 4.5 covered 9729.5.  And MNI put out a piece with this:   “The Rates Strategy team at Goldman Sachs still holds a bearish stance on US rates and continues to expect 10Y and 5Y year yields to reach 3% and 2.25% by year-end 2014 and get to 3.5% and 2.75%, by year-end 2015, respectively.”  I’m going to be surprised if even the 30 yr bond has a three handle at year end.  In spite of Bullard’s hawkish comments on tightening, the back end of the curve just isn’t buying it.  Or, they ARE buying it, which is to say they aren’t buying the economic/labor lift-off scenario.  Back in 1994, when the 30 yr bond contract was king, I remember seeing an interview with Tom Baldwin, at that time one of the biggest floor traders, correction, one of the biggest bond traders, period.  It was when the Fed had begun tightening, and he said for the first couple of points he fought it, but when he continued to see waves of selling, he just turned around and went with the tide.  There are a lot of people fighting the good fight against this rally, but as a friend of mine advises, “you can be bearish, just don’t be short.”
–Across the headlines yesterday was news that the ECB had retained BlackRock to advise on ABS buying.  DB referred to it as private asset QE.  Is it just me or is that waving the white flag?  In 2009 there was a lot of talk about the transfer of crappy debt from the private sector to the government in order to save the banking system.  Now the ECB is jumping into that arena, just prior to the October release of banking stress tests.  I’m sure all the banks will sail through stress tests with flying colors, and within a few months there will be a colossal failure with the usual, “nobody could have seen that coming” excuse.

Posted on August 28, 2014 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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