June 12. Bond yields spike, then close lower…

–Turnaround Tuesday as interest rate futures spiked to new lows in the morning and then rallied to close higher.  There was a brief pullback after the 3 yr auction, but it was around that time that news reports surfaced about Japan’s FSA proposing to have investors “bail-in” banks in case of problems. Japan FSA plans to adopt bail-in policy for failing banks, to force losses on investors if necessary – Nikkei News  The yen surged and US treasuries finally turned positive. (USD/JPY was down 2.8% on the day).
–Ten year note closed just above 219, down 2 bps on the day, but had traded over 229 in the morning.  The curve flattened with red/gold euro$ pack spread down by over 4 bps to just above 200 (above 210 in the morning).  Ten year auction today.
–There has been a lot of press about emerging market volatility in the past week.  Indeed, the emerging market etf (EEM) has fallen over 10% in the past month.  Reuters posts this story: “If currency turbulence in emerging markets escalates into full-scale investor flight, the Federal Reserve may have a fresh headache in deciding when to slow its dollar printing policy.” http://www.reuters.com/article/2013/06/12/us-investment-emerging-fed-analysis-idUSBRE95B04B20130612
–I believe that Japanese policy of importing inflation and exporting deflation has more to do with market turmoil than decisions out of the Fed, and that the ten year inflation index note yield moving from negative 20 or so to positive 6 bps is a reflection of declining US inflation expectations.  Next week’s FOMC will likely highlight disinflationary concerns.

Posted on June 12, 2013 at 5:20 am by alexmanzara · Permalink
In: Eurodollar Options

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