Jan 31, 2018. Bond fundamentals

–Going into Trump’s State of the Union address SPX fell 1.1% and VIX firmed to 14.26.  Dollar is weaker this morning, stocks have stabilized.

–The long end of the market did not respond to equity weakness yesterday; tens rose 3.2 bps to 272.4 and 30’s rose 4.1 bps to 297.9.  All eurodollar calendar spreads made new highs, with EDH8/EDH9 squeezing out a gain of 0.5 to 57.5. Notable buying in EDZ9/Z0 yesterday at 9.5, it closed 10.0.  Red/gold pack spread +2.375 to 31.25, a new recent high as well.  For the fixed income market, it’s not about other asset prices and their influence on economic activity, it’s the possibility of INFLATION and SUPPLY.  Ten year tip/treasury b/e now up to 210 bps and the 5y5y inflation forward is 242 bps.  Today is Yellen’s last FOMC,  For the most part, the Fed’s been running around like the tin man in the Wizard of Oz trying to figure out the lack of inflation.  What IF inflation starts coming back simultaneously with fiscal stimulus and increased supply.  The Great Oz has given you a diploma; bond yields will go up.

–Perhaps it won’t just be treasury yields.  Gundlach late yesterday mentioned the junk bond etf JNK, which closed lower on year.  It was in November when we last had concern about junk bond outflows; price action suggests this issue will again move to the forefront.

–The NY Fed announced it has started its search for Dudley’s replacement, underscoring the change in the Fed’s composition.  Janet Yellen’s tenure was unscathed, but it might not be so easy for Powell.

Posted on January 31, 2018 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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