June 14. Marking time to the FOMC


  1. US Treasuries hit important levels and hold
  2.  Continued improvement in labor
  3. Flow of funds Z.1 report; strong corporate debt growth
  4.  FOMC projections and dots


Week to week changes on selected prices:

6/5/2015 6/12/2015 chg
UST 2Y 71.7 72.2 0.5
UST 5Y 173.7 173.3 -0.4
UST 10Y 240.0 238.5 -1.5
UST 30Y 311.1 309.5 -1.6
GERM 2Y -17.8 -18.4 -0.6
GERM 10Y 84.4 83.4 -1.0
EURO$ Z5/Z6 * 90.5 89.0 -1.5
EURO$ Z6/Z7 68.0 64.5 -3.5
*peak one-yr spd
EUR 111.14 112.57 1.43
CRUDE (1st cont) 59.13 59.96 0.83
VIX 14.20 13.80 -0.40

Overall, not much net change on the week in terms of bond yields.  Last week we mentioned yields were approaching important levels, for example 250 in tens, the 0.618 retrace from the high of 2014 to low of 2015 (303 to 164).  On Thursday morning after a somewhat stronger than expected retail sales report, that level was achieved and held, spurring a short cover rally.  Friday’s close was 238.5 (at futures settlement; TYU5 125-100s).  The thirty year bond yield has been hovering around the 50% retrace of its 2014 high yield of 397, to 2015 low of 222, which is 309.5, the exact closing mark on Friday.  (The 0.618 retrace is 330).  German bunds also continued a push to higher yields, hitting 105.6 Wednesday morning.  However, by Friday the bund yield came back down to 83.4, actually down 1 bp on the week. But peripheral yields jumped as the situation with Greece failed to improve: JUNCKER TOLD TSIPRAS THIS IS FINAL ATTEMPT FOR DEAL.  On Friday morning Italy tens surged to 230, having been near 1% in March.  Interestingly, EUR closed higher on the week at 112.57 from 111.14 last Friday.

In terms of US economic data, labor market indicators continue to improve.  For example JOLTS released Tuesday showed job openings of 5.376 million, a new high, having doubled in the past five years.  A Bloomberg article Friday, “Here’s one labor market indicator that’s soaring”, highlighted a 20% jump in Q4 earnings of Korn/Ferry, the world’s biggest headhunting firm. “Last night, the company reported that activity levels picked up — especially in North American executive search, up 10 percent year-over-year.”   The Atlanta Fed’s GDP Now projection, which in late May was 0.7% for Q2, surged to 1.9% on June 11, as data strengthened.  The nowcast for Q2 real consumer spending growth jumped from 2.1% to 2.9% following vehicle sales data and the retail sales report.  Friday’s PPI headline release of 0.5 is another factor that should support higher yields, though the Core yoy growth was only 0.6.

Also released last week was the Fed’s Flow of Funds report Z.1.  Most of the press looks to this report for information on changes in net worth.  But there are a couple of interesting notes regarding domestic debt levels and growth.  First, in terms of levels, there are three sectors of nearly equal size: Household (Mortgage and Consumer), Business (Total and Corporate), and Government (Local and Federal).  The debt levels at the end of Q1 are $13.6T, $12.2T and $16T (of which Federal is $13).  The interesting notes are 1) In terms of household growth, the total is only 2.2% annualized, down from 2.9 in all of 2014.  Mortgage growth was actually negative, -0.3.  (Can the world really depend on the US consumer?) The strongest domestic debt growth rate was Corporate, +7.2, from 6.5% for all of 2014.  And while the Federal debt change was also negative, falling by $53.8 billion, state and local gov’ts more than made up for it, growing by $140.2B.


It’s now well known that that has been significant corporate debt issuance in order to fund share repurchases, and Goldman noted last week that this dynamic is beginning to draw political scrutiny: “Some lawmakers have linked share repurchases with stagnant wages and a lack of business investment and have recently begun to call for regulatory changes to constrain repurchase activity.”


A change in the propensity of corporates to continue propping up shares with buybacks could take away a very important support factor for the market in general.

From the Daily Shot, “Corporate loan balances on banks’ balance sheets are growing at some 12% per year.”  St Louis Fed’s FRED:

Commercial and Industrial Loans

Commercial and Industrial Loans













Now let’s move to this week’s FOMC. Consider the tables below:


3/13/2015 3/18/2015 6/11/2015
EDZ5 99.210 99.310 99.345
EDZ6 98.325 98.520 98.455
EDZ7 97.760 98.000 97.810
end of year dot average> 2015 2016 2017
DECEMBER 1.125 2.537 3.779
MARCH 0.772 2.022 3.184
change>> -0.353 -0.515 -0.595

The last FOMC with a Summary of Economic Projections was March, when the Fed slashed its economic growth forecast, from a range of 2.6 to 3.0 in December to 2.3 to 2.7 in March for 2015, and its 2015 inflation forecast from 1.0 to 1.6 down to 0.6 to 0.8. The dot projections also showed huge declines (Lower table). For example, the end of year 2016 fed fund projection went from 250 bps to 200 bps. Eurodollar contracts, of course, rallied. EDZ16 went from 98.325 on the Friday prior to the Fed to 98.520 on the FOMC 3/18 settlement (98.455 Friday). EDZ17 went from 97.760 to 98.000 (97.810 Friday). You can see from Friday’s settlements that we’re not far away from March 18 end of day levels. Almost certainly the dot averages will have to come down again this week, given the Fed’s repeated guidance of gradual rate increases. However, net changes from March to June are likely to be much smaller than they were from December to March. The March projection of 2.022 would be consistent with a price in EDZ16 of around 97.60 to 99.70. The settlement on Friday was 98.455, consistent with a funds target of 1.25%. The market believes Fed pronouncements that rate hikes will be gradual, the FOMC members are just coming around to that concept…

Posted on June 14, 2015 at 2:27 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply