Dec 13. Bonds slide

Bond sell off continued Friday while stocks made new recent highs.  All eurodollar calendar spreads are making new highs, with front to red year spreads averaging around 75 bps (still fairly low). From lows last month the ten year yield is up nearly 100 bps, to 3.30% Friday.  Many analysts are pointing to the Obama tax deal as a huge stimulus that may spur self sustaining economic growth. However, the bond market might be reacting more to the idea that the deficit will balloon, rather than the idea of healthy growth.  After all, the extension of tax cuts and unemployment benefits isn’t really new stimulus, but rather a delay of liquidity withdrawal.  In any event, bonds are in a bear market.  Everyone who had wanted to be long already has the position, and those that expected legislative gridlock and a move toward fiscal austerity have been taken by surprise.  The “lower for longer” camp may well start second guessing that opinion. And the economy is likely to gain further traction even though it will be unbalanced growth.
–Copper and energy prices remain strong, with the former at a new high.  The US has managed to export inflation and China is trying to contain it.  While US corporates see improved pricing power, the move to higher rates, and the risk that US treasury auctions see poor demand will likely further weigh on housing, which was one of the original problems in the economy.
–Ironically, one of the leaked wikileaks cables from 2009 expressed the view that Cuba could become insolvent in 2-3 years.  Nice that US intelligence identified that risk, but seemed to miss Greece, Ireland, Portugal, Illinois, major banks…etc.

Posted on December 14, 2010 at 11:55 am by alexmanzara · Permalink
In: Eurodollar Options

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