August 10, 2012. Beware a steepening curve.

–Corn made a new high in front of today’s USDA report, with good buying in CZ 900c by JPM.
–Interest rate futures made new lows in front of the 30 yr auction, but selling pressure abated upon completion and the market drifted higher. Implied vol eased as new lows were rejected.
–August midcurve option expiration in dollars.
–There are several new warnings about risk in the long end of the curve. From Pimco’s El-Erian (BBG) “What we would caution is rather than the level of the rates, the shape of the curve,” El-Erian said. “The long end is exposed to a lot more risk.” From Elliott Mgmt: “long-term government debt of the U.S., U.K., Europe and Japan probably will be the worst-performing asset class over the next ten to twenty years. We make this recommendation to our friends: if you own such debt, sell it now. You’ve had a great ride, don’t press your luck. From here it is basically all risk, with very little reward.”
–I marked 2/10 at 142, a new recent high.
–Pension and health care costs continue to plague muni finance, but zero rates tend to pressure investment returns lower across the spectrum, creating a negative spiral in that pension funds that can’t hope to meet targets, so belt tightening occurs in other parts of the budget.
–President Obama, touting gov’t assistance for the auto industry: “I said, I believe in American workers, I believe in this American industry, and now the American auto industry has come roaring back,” he said. “Now I want to do the same thing with manufacturing jobs, not just in the auto industry, but in every industry.” Note: GM stock was around 40 in the beginning of 2011, now around 20. As I recall pension and health costs were shifted to the union, and the fact that the US gov’t is a big customer and regular buyers are being financed by Ally/GMAC at ever lower rates isn’t exactly the foundation for continued strength. (From Fed website, 48-mo new car loan rate has gone from 5.40 in Q4’11 to 5.07 in Q1’12 to 4.87 in Q2’12).

Posted on August 10, 2012 at 3:55 am by alexmanzara · Permalink
In: Eurodollar Options

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