June 10. Fundamental economic picture diverges with bond market technicals

–Friday’s reaction to unemployment underscored the sentiment shift in the bond market as the ten year note jumped 9 bps to nearly 217.  NFP was about as expected though some aspects of the report were weak, including wage growth (avg hourly earnings up 0.0).  However, all back month eurodollar calendar spreads made new highs; red/gold pack spread gained over 10.5 bps to reach 199, just below the highs set in March ’12.
–In my opinion, the economy is again slowing and inflation is declining, apparent in sev’l economic reports but also on display in markets like silver, which is trading at its lowest level in 14 sessions and nearing spike lows from mid-April and May.  However, when the fundamental outlook is at odds with market technicals, it’s best to go with the latter.  A couple of analysts have noted that ten year yields around 2.20-2.25 could unleash forced selling related to MBS convexity issues.
–Data from the weekend exposed weakness in China’s trade… (RTRS) ” Exports to the United States, China’s top export destination, fell 1.6 percent in May, the third straight month of declines, while those to the European Union, the second most important market, fell 9.7 percent, also the third straight month of declines.”  Conversely, Q1 GDP in Japan was revised higher.  Japan’s strategy of importing inflation and exporting deflation has worked so far, in part at the expense of other Asian exporters.
–This week features treasury auctions of 3’s, 10’s and 30 yr bonds.  June midcurve options expire Friday.  FOMC is next week.

Posted on June 10, 2013 at 5:38 am by alexmanzara · Permalink
In: Eurodollar Options

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