Feb 23. Yellen tomorrow. Bonds trade long and heavy.
–The early part of Friday’s trade saw buying of US treasuries and calls as a deal with Greece looked shaky. Ultimately of course, an agreement was struck for a four month bailout extension, and the TY April 130 call buyer reversed course. Ten year yields rose just over 1 bp to 212.5. Eurodollar calendar spreads edged to new highs, for example red/green pack (2nd to 3rd year) spread rose 0.625 bp to just over 69. I would note that in October red/green pack spread was around 90, so there is still plenty of room to the upside in case Yellen leans hawkish on Tuesday.
–After Friday’s close, the WSJ said Deutsche Bank was likely to fail the Fed’s stress test over “how they measure and predict potential losses and risks”. It seems as if the need to raise capital in the EU is simply unending, and there are open questions as to the efficacy of QE measures, though the primary goal of weakening the euro seems to be working. The dollar is stronger across the board this morning with EUR -87 nearing 113. Commodity currencies and commodities (gold -12, oil -55) are lower.
–There are a lot of factors that should support US treasuries, including the wide spreads against other sovereign bonds, a slowdown in global growth as reflected in commodity prices and the Baltic Freight Index, and the stronger dollar that makes US assets attractive. On the other side, that very same factor ($ strength) makes US stocks appealing despite low earnings growth, and further tends to dampen inflation. Additionally, the employment picture in the US has clearly improved. Those are the issues for Yellen to grapple with tomorrow. For now, bonds simply trade heavy, and if Yellen emphasizes domestic growth rather than internat’l risks, then yields are likely to press higher. The burden of proof is on the longs who have already placed heavy wagers.
–News today includes Chicago Natl Fed Index expected +0.15 and Existing Home Sales at 4.95m.
–After Friday’s close, the WSJ said Deutsche Bank was likely to fail the Fed’s stress test over “how they measure and predict potential losses and risks”. It seems as if the need to raise capital in the EU is simply unending, and there are open questions as to the efficacy of QE measures, though the primary goal of weakening the euro seems to be working. The dollar is stronger across the board this morning with EUR -87 nearing 113. Commodity currencies and commodities (gold -12, oil -55) are lower.
–There are a lot of factors that should support US treasuries, including the wide spreads against other sovereign bonds, a slowdown in global growth as reflected in commodity prices and the Baltic Freight Index, and the stronger dollar that makes US assets attractive. On the other side, that very same factor ($ strength) makes US stocks appealing despite low earnings growth, and further tends to dampen inflation. Additionally, the employment picture in the US has clearly improved. Those are the issues for Yellen to grapple with tomorrow. For now, bonds simply trade heavy, and if Yellen emphasizes domestic growth rather than internat’l risks, then yields are likely to press higher. The burden of proof is on the longs who have already placed heavy wagers.
–News today includes Chicago Natl Fed Index expected +0.15 and Existing Home Sales at 4.95m.
