Feb 16. Bonds ‘smarter’ than stocks?
–Yields edged higher Friday, with the ten year note closing over 2% at 2.017, up 3.7 bps on the day. Large trades on the day were a seller of about 70k EDM5/EDU5 calendar spreads from 19.5 to 18.5 (settled 19) and a buyer of 60k 0EM 9862/9837p 1×2 for 1.0 bp, (settled 0.75). The former trade appears to be a roll into a new long position in EDU5, and the latter is also a new position, with EDM6 at 9871.5 or 9 bps away from the upper strike.
–Stocks are making new all time highs. It’s interesting to note that crude oil made its low (at least for now) in late January. The same is true for the Euro. However, the Dow Jones oil and gas producers index made its low in mid December. JNK, a junk bond etf, similarly made its low in mid December, as did EEM, the Emerging Markets index. Major stock indexes also tested and held the December low as oil crashed into late Jan; the point is that even the sectors that should have been the MOST vulnerable bottomed before the end of the year. So stocks were already apparently looking past possible economic damage due to lack of global demand as reflected in the price of crude oil. Typically, people refer to the bond market as being “smarter” than the stock market. But now, as stocks shrug off signs of economic malaise, eurodollar calendar spreads are quietly edging to new recent highs. For example, the red/green euro$ pack spread (2nd to 3rd year) was up 1 bp to a new recent high just above 62. Red to blue (2nd to 4th) also notched a new high at just under 97 bps. Previously, as Fed officials parroted the company line that rate hikes were likely this year, the curve would flatten, as if ANY rate hike would be more than the economy could withstand. Now there has been a minor change in tone and back end contracts are reflecting the idea that perhaps rate hikes might be a bit more aggressive than thought. Once again, it appears to have been initially signaled by the stock market…
–Note that CME electronic markets close at noon CST due to the holiday with Greek negotiations looming as the major event.
