Dec 19. Sorry…it’s another post about BUYING CURVE
–Explosive stock rally yesterday, even as oil had a late plunge (Saudi’s “Naimi says global economy slowdown largely behind market problem”). Euro also continues to test new lows.
–Yields rose in the face of equity strength, with tens up 8 bps to just under 221. Implied vol in interest rate options has been crushed since the FOMC, especially in high gamma… all midcurve Jan straddles fell about 3 bps.
–Red/gold eurodollar pack spread jumped over 7 bps yesterday as reds were -3 and golds -10.125. I sent out a couple of charts yesterday noting that 5/10 spread was near critical support 52-53 bps. 5/30 is also near strong support. Everything that can cause flattening is now well known: stronger dollar, declining inflation expectations, a less accommodative Fed at the front end. The curve has flattened all year, with many calling for a continuation in the trend. There’s an incisive chart on BI this morning [ http://www.businessinsider.com/slok-10-year-rate-forecasts-2014-12 ] with DB’s Torsten Slok calling it the most important chart of the decade. It shows that professional forecasters have wrongly been calling for higher ten-yr rates for ten years. My thought is that when everyone KNOWS that the curve has got to flatten, and the pros can easily tick off compelling reasons for continuation of the trend, it might be over. As I’ve noted previously, the curve ended 2013 close to the absolute highs for the year…why can’t the closing month of 2014 mark the low? If I was a central banker (like I’ve always wanted to be) with reserves of longer dated treasuries, I could see strategically letting the market have tens at 2% to 2.25% and moving closer in on the curve (or of course, buying gold!).
–The eurodollar curve offers the same sorts of spreads as treasuries, for example reds to blues or reds to golds, which can be expressed using midcurve options. Again, these spreads have collapsed over the year, and are at important support levels. (see note on 5/10 below). Red/gold was 305.75 on Dec 31, 2013. It was at 127 Wednesday and popped to 135 yesterday.
