Jan 30, 2013. Trend toward higher rates still in place.

–Trends that have been in place are continuing this morning, with yen weak against everything and EUR making new high vs USD. EUR/JPY now over 123.50. Stocks edging higher from yesterday’s gains. US interest rates are up, with the 30 yr bond contract making new lows.
–Today’s news includes Q4 GDP (expected 1.1%), ADP, 7yr treasury auction and FOMC announcement. Consumer Confidence yesterday was quite weak, coming out at 58.6 vs 65 expected, now catching up with other polls that have shown waning economic enthusiasm such as NFIB Small Business Optimism which had plunged to March 2010 levels, “one of the lowest readings in survey history.”
–However, yields continue to press higher, and the curve is steepening with all deferred euro$ calendar spreads making new highs. For example, red/gold pack spread gained almost 3 bps (over 159). There continues to be new buying of gold (5th year) eurodollar puts. Yesterday paper bought 7500 Gold March 9775 put with Gold June 9750p, paying 18 to 20.
–Against a backdrop of less than robust economic data it may seem odd that yields are rising and money is shifting from bonds to stocks, especially as the last FOMC introduced inflation and employment thresholds for removing accommodation. However, the Dec minutes suggested QE may taper off this year, which would make sense given a new Fed Chairman coming in next year, allowing more flexibility for policy changes. And this “out” will surely remain in today’s Fed Statement, “….the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.”
–It’s probably more appropriate to frame the recent bond sell off in terms of rate normalization, rather than a reflection of economic resurgence. 2% is still low for tens in a more normal environment. The big changes have been internal in terms of gradual improvements in housing and employment, and external, with Japan devaluing and China stimulating. Additionally, though this may be a minor factor, I have seen several articles noting that rate increases will add to the deficit as profits from the Fed’s portfolio decline and are no longer funneled to the treasury. In any case, the trend is currently in place for higher rates and a steeper curve in spite of economic uncertainties.

Posted on January 30, 2013 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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