Jan 6. It’s starting to become unhinged…ten year yield sub 2%

–US ten year yield is back below 2% this morning as oil continues to crash (now below $49/bbl) and stocks press lower.  Both the Nikkei and Sensex (India) fell 3% today.  Tens yesterday fell over 8.5 bps to 203.5.  The curve is getting crushed, with every back spread at new lows.  5/30 is only 104 bps, having dropped 4 yesterday.  Red/gold eurodollar pack spread is just 110 bps, fell nearly 10 bps!  One year ago 5/10 treasury spread was over 140, but late yesterday was only 46 bps, on the same downward trajectory as seen in 2004 to 2006 when the Fed was tightening 25 bps at every meeting.  For the curve to be this flat with a funding rate near zero is telling you something, and I would say that it’s negative for the global economy.  (I’m sure the guys on tv will tell you it’s a signal to buy stocks).

–Implied vol is firming on the move to lower yields.  Once again, ETF’s that might be considered canaries in the coal mine are getting hit, with EEM (emerging markets) down 1.8% yesterday and hi-yield JNK and HYG also turning over, though nowhere near mid-December lows.  The spread between treasuries and hi yield is, of course, blowing out, but again, spreads are lower than levels associated with mid October and mid December, so no reason to panic…yet.

–The stark failure, in my opinion, of QE programs is on graphic display when comparing SPX with the CRB index.  SInce late 2012, stocks have been in a strong rally.  The CRB, associated with THINGS rather than cash flows, and perhaps a better monitor of global economic health, has gone down.  (Chart attached).

–Today’s news includes Factory Orders expected -0.5% and Service ISM at 58.0 vs 59.3 last.

Chart below is CRB in white and SPX in red.  Though the CRB heavily is influenced by oil, the divergence from late 2012 is probably a signal of broader issues than simply energy prices.


crb v spx

Posted on January 6, 2015 at 5:12 am by alexmanzara · Permalink
In: Eurodollar Options

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