August 18. Why can’t rates go lower?

–New lows set in near eurodollar calendar spreads on Friday.  Red/green pack spread remains under 98 bps.  Dec’14/Dec’15, covering next year’s expected tightening, fell 2 bps to a new low of 66, having been at 84 at the end of July.  As colleague Todd Colvin notes, maybe the market should be thinking less in terms of 1/4% tightening increments, and consider moves of 1/8%.  For example, August ’15 FF contract was recently trading at 50 bps on Fed hike prospects, but closed Friday at 3/8% (99.63). Red/gold pack spread fell just over 2.5 bps to close at 201, as the dollar curve continues to flatten.  Ten year yield was down 6 bps to 234.  While stocks rebounded from an early drop caused by Russia/Ukraine tensions, treasuries maintain a bid.  Many people refer to both stock and bond bubbles, but going into the Jackson Hole Conference, bonds are likely to keep a firm undertone near recent new low yields. Yellen speaks about the labor market on Friday at 10:00 EST.  An article on Bloomberg this morning highlights the large number of people working part-time because they can’t find full time employment.  Draghi’s speech is at 2:00 EST Friday.
–In skimming the headlines this morning, there were references on several sites to declining property values, notably in China.  (FT) China property prices fall…New home prices fell by 0.9% between June and July, the sharpest drop in three straight declines.  The UK is also in focus. (BBG) London Home Asking Prices Plunge Most in More Than Six Years …Nationally, prices declined 2.9 percent, a record for an August.  And in the US, a bumper crop in corn with the resultant plunge in prices is likely to pressure farm values.  Deere & Co has already been affected, having announced Friday “it will lay off more than 600 factory employees indefinitely as part of its plan to scale back agricultural equipment production amid weaker demand.” (Market Watch).
–The point is that subdued labor markets coupled with property values that have come off the boil are factors that could keep global rates biased to the downside.

Posted on August 18, 2014 at 4:57 am by alexmanzara · Permalink
In: Eurodollar Options

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