Dec 9. Curves steeper in wake of ECB / Fed’s Z1 debt levels
–Curves steepened in the wake of the ECB meeting, which featured a slight taper from €80b month to €60b beginning in April, but also expanded the amount of shorter term paper the bank could buy. The German curve (2/10) immediately rallied to levels not seen since June of 2015, and has now surged from around 50 this past June to 115 currently. As Jim Bianco has noted, Central Bank actions are ‘fungible’ and the US curve also steepened, with 2/10 up 4 bps to 128.5 (just shy of a new high). The ten year note on its own rose 4.4 bps to 238.9. Red/gold euro$ pack spread gained the same magnitude as 2/10, up 4 to 94.375. While a steeper curve helps the financial sector, the rise in yields at the US long end could begin to crimp housing going forward.
–After an initial jump the euro reversed and closed near the lows, just above 106. The dollar index strengthened, and I would note that today CNY is above 6.90 (yuan continues to edge lower). The stronger dollar will certainly hinder Trump’s efforts to keep mfg in the US.
–Late yesterday the US long end met renewed selling pressure and is lower this morning. Big trade yesterday in ten year options was a buyer of TYF 123/122 put spreads, in size of about 70k, a simple roll up to the 123 strike which gained 46k in open interest. There were also exits of puts, for example, Blue Feb 3EG 9775/9737 p 1×2 was sold 12k at 5.5.
–Odds of a hike in the beginning of next year remain muted. Feb/April FF spread settled at 5.0 (20% chance of move in March). I continue to favor buying EDM7 9875p which settled 4.5 and are 8 bps out of the money…covers the march, May and June FOMCs.
–Late yesterday the US long end met renewed selling pressure and is lower this morning. Big trade yesterday in ten year options was a buyer of TYF 123/122 put spreads, in size of about 70k, a simple roll up to the 123 strike which gained 46k in open interest. There were also exits of puts, for example, Blue Feb 3EG 9775/9737 p 1×2 was sold 12k at 5.5.
–Odds of a hike in the beginning of next year remain muted. Feb/April FF spread settled at 5.0 (20% chance of move in March). I continue to favor buying EDM7 9875p which settled 4.5 and are 8 bps out of the money…covers the march, May and June FOMCs.
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The Fed’s Z.1 report for Q3 2016 was released yesterday. While the press mostly focuses on Net Worth, which, yes, increased again to $82.43T from $80.96 in Q2, I prefer to look at debt levels. Roughly speaking, the three big categories of Households, Total Business (including Corporate) and the Federal Gov’t are each about one third. In terms of outstanding debt, HH have $14.63T, Biz has $13.41 and the Federal Gov’t has $15.89. However, in looking at growth levels for Q3’16, HH grew at a rate of 4.0%, Biz and 6.0% and Federal Gov’t 8.2%. In fact, the Federal Gov’t debt growth sort of stands out, both on the attached chart from the Fed’s website and from the tables. I have not done the work to entirely justify this next idea, but I’m just throwing it out there (a la President-Elect Trump). Growth in Federal Gov’t borrowing has likely already been juicing the economy to some degree. In other words, maybe the Trump stimulus has already occurred to some extent? Just a thought. I would further note that just the corporate side of the Business category has been growing fairly rapidly and now stands at a record $8.44T. Are businesses going to rapidly accelerate given relatively heavy debt loads currently?
