Jan 7. Possible trend change in US long rates…

–Employment data came out pretty much as expected with NFP up 155k. Yields continued to edge slightly higher. New high in 2/10 treasury spread near 165, up only 1 bp Friday but fully 15 bps from the end of the year last Monday. Red/gold pack spreads rose 2.5 bps to 150.75. Tens +1.5 to 191.5.
–All treasury puts (except Feb expiration in bonds) saw increases in open interest, an indication the market still perceives risk to the downside. Treasury auctions 3’s, 10’s and 30’s this week.
–VIX has plunged below 14 since the fiscal cliff deal sparked the rally in stocks, with SPX apparently ready to challenge the high of 1576 set in 2007. (SPX close 1466). Going into the end of the year VIX hit 23, current level of 13.8 is about as low as it gets.
–I don’t think economic data on its own would argue for a sustained rise in US yields. However, the bombshell out of the minutes suggesting a wind down of QE at the end of the year, along with an inability to tackle structural fiscal issues, and more talk about the “platinum coin” as a solution to the debt limit might tilt the market’s collective consciousness toward the bear scenario. Add in Japan’s pledge to weaken its currency and stoke inflation, and measures by China to support demand, and it may be enough to spur a rush toward the exits in the crowded long bond trade. Bruce Krasting had an interesting take on Fed minutes, suggesting that perhaps Bernanke wants to put Fed policy in a more neutral stance going into the end of his term one year from now. http://brucekrasting.com/bernankes-legacy-problem/ He notes that Greenspan was raising the FF rate going into the end of his tenure to leave a more open table for Bernanke. Perhaps a stretch, but maybe the Fed wants to also take a small step back from being the only game in town for the economic policy of the country. Note that there are several Fed speakers this week: Lacker tomorrow, George, Bullard and Kocherlakota Thursday.

Posted on January 7, 2013 at 5:54 am by alexmanzara · Permalink
In: Eurodollar Options

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