July 10, 2012. New lows in US curve; is “worst case” already priced?

July 10. Themes remain the same. Deterioration in europe (though the euro stabilized) and a flatter US curve. 2/10 made a new low at 125 as the ten year yield fell to 151 in spite of this week’s auction schedule. Red/gold pack spread dropped over 5 bps to a new low of 114.5. The rally in deferred contracts over the past several months has been stunning. For example, since the low in mid-March, EDU16 (gold Sept) has rallied from 9720 to 9850, 130 bps in 4 months. Perhaps 2/10 can get to 100 bps, but I feel that the risk of steepening is growing. The administration is talking about extending Bush era tax cuts (for incomes under $250k). The idea of pulling out all stops to juice the economy going into the heart of the election cycle is compelling. Also, the eurozone is taking steps on Spain’s banking problems with direct funding and an attempt to separate banks from the sovereign’s balance sheet.
–Fed speakers are all talking up QE3 (Rosengren, Evans, Williams)….they’ve thrown in the towel with respect to organic growth. But I am finally seeing a lot of road and infrastructure projects. The data has been bad, though May consumer credit showed a large increase. It’s clear that Asia is slowing, Shanghai Comp is at the lows from the start of the year, and things like Port of Long Beach CA traffic declining 7.2% yoy in May indicate less trade. But perhaps the US curve already has priced in “worst case” scenario. This week’s auction results may be quite important… 3’s today followed by tens and long bonds Wed and Thursday.

Posted on July 10, 2012 at 5:54 am by alexmanzara · Permalink
In: Eurodollar Options

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