Dec 20. 5/30 Treasury spread tumbles in wake of the Fed taper

5_30 Dec13

–Large 11 bp drop in 5/30 treasury spread (above) to 226 as 5 yr note yield jumped 10 bps to 164.   Recall that in the early part of this year 5’s were more like 70 bps; yield has more than doubled.  Green euro$ pack weakest on the board, down nearly 14 bps.  30 year bond yield was unchanged.  Rather than QE to keep bond yields low, maybe the Fed should just re-instill fears of monetary tightening – long end yields will fall as the curve flattens. And stocks will maintain their bid because long treasury yields don’t provide competition. Voila!
–Of course, this idea comes with its own set of problems including: 1) falling inflation expectations as gold was hammered $40 yesterday, 2) a stronger dollar, 3) renewed capital outflows from emerging markets.  As a post on ZH notes, one of the US Treasury’s risks for 2014 is ‘spillover from emerging market weakness’. (Yesterday the rupiah and turkish lira made new lows, and Brazil real weakened). As the US share of global GDP edges lower, US policy is more susceptible to outside forces…
–$/yen at new high around 104.50 as the BoJ pledges to retain easy money, while in China, interbank rates are surging and Shanghai Comp is down around 2%. “The seven-day repurchase rate was up to a six-month high of 7.6% in Shanghai on Friday…”from 7.06% Thursday (BizInsider).  Apparently an attempt to quell rampant speculation.
–Heavy buying of Green midcurve puts yesterday, along with aggressive buying of Green and Blue March straddles suggests weakness in the belly may not be over.

Posted on December 21, 2013 at 4:51 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply