July 10. Fraying at the periphery; say a prayer to the holy ghost…
–Yields ended lower yesterday, with tens down 1.7 bps to 254.6. New low in red/green pack spread to 98.375, -1.625 on the day. There was a brief sell off following a tepid 10 yr auction (259.7 vs w/i 258.5) but buyers came in after Fed minutes and futures closed at the high. I didn’t fully read minutes but the discussion on rate normalization appears to have little sense of urgency. I did find the following passage rather interesting though: “Market participants continued to discuss the decreases in long forward rates since the beginning of the year and pointed to a variety of domestic and global factors possibly contributing to this trend, including lower expectations for potential growth and policy rates in the longer run, a decline in inflation risk premiums, purchases of longer-term securities by price-insensitive investors, unwinding of short Treasury positions, and falling interest rate uncertainty.” Rather than a sophisticated panel of central bankers, this sentence sounds like it’s describing a few phone clerks discussing why bonds rallied over a few beers after work…”short covering” and “oh…that guy doesn’t care about the price when he buys because he’s got something else against it…” WTF! Might as well throw in “…we hit buy stops…” And, while the bond rally might be because of lower expected potential growth, the discussion of stocks says they were “apparently boosted by a more optimistic assessment of near-term economic prospects.” The central bank doesn’t seem to have a very cohesive view of domestic markets. Bonds rally due to subdued forward economic prospects but stocks rally because of near term growth optimism. How much money would you let a guy manage who came to you with that pitch? $4 TRILLION I guess.
–Besides obvious dislocations in geopolitical events, there appears to be fraying at the edges of the financial system that could lay bare structural problems in the center that were never properly addressed. For example, Portugal yields are rising as Espirito Santo missed a debt payment. Austrian Erste Bank several days ago restated financial results. (This as the ECB is in the midst of the stress tests and trying to determine how to account for expected US imposed fines a la BNP). Puerto Rico bonds are crashing, dragging muni funds lower. Japan machine orders plunged by nearly 20% (I guess that “arrow” was pointed at the ground). Both Walmart and The Container Store have cast suspicions about the underlying strength of the US consumer. The problems work their way in, from the periphery to the center…
–Jobless Claims today expected 315k. 30 yr bond auction. Stanley Fischer speaks after the close on the topic of central bank regulation.
–July midcurves expire tomorrow. Late yesterday there was a buyer of Blue July 9750c for 0.25 ref 9739. Now trading 9742. Maybe it’s not such a reach, with SP’s -15.00.
