Jan 27. “…survey-based measures of longer-term inflation expectations have remained stable”?
–Shorter maturities led US interest rate futures marginally lower yesterday. Ten year note yield was up 1.3 to 182.3, red eurodollar pack was -2.625. 2 and 5 year note auctions were re-scheduled to Wednesday and Thursday. Market action suggests sporadic profit taking; bonds trade a bit long as the Greek election passed and associated price spikes quickly dissipated. The “news” has mostly been absorbed…for example, the late downgrade of Russian debt to junk barely caused a ripple with TYH just ticking to 129-24, well off the overnight high 130-06 associated with Syriza’s victory. Other indicators also suggest a bout of profit taking (though not a change in trend). Open interest was down in all treasury futures, with TY the leader at -85k. Implied vol was hit, with TYH 129.5 straddle trading 1’51 early and settling at 1’46. USH 150^ settled 3’38 on Friday and closed 3’22. Unwinding of hedges and insurance. As a friend says, “you can be bearish. Just don’t be short.”
–Attention now turns to the Fed. From the last statement: “Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.”
I track ten year notes vs inflation indexed tips…the spread is now around 161, as opposed to 165 – 170 at the time of the last Fed meeting, and an average of 190 in the month of November. Inflation, (or the lack thereof) appears to be the critical factor, with dollar strength a contributing factor that the Fed can’t ignore.
