June 18. Curve steepens to new high in front of FOMC tomorrow

–Curve steepened to new highs yesterday with 2/10 treasury spread up 5 bps to 191.4 and (new) red/gold euro$ pack spread up over 7.5 to nearly 213.  A piece by FT late in the day suggesting the onset of tapering accelerated the bond slide, but as the author pointed out, the Fed doesn’t leak stuff during the blackout period.  I think there’s risk of a decline in growth forecasts, and that low inflation will be cited as a concern.
–Several news reports are renewing speculation about a new Fed chief as Obama said that Bernanke has stayed at the Fed longer than he (BB) wanted.  The announcement will likely come in August, as Bernanke has already said that he won’t be going to the Jackson Hole conference.  The new appointee (Yellen, Geithner, Summers) will probably be inclined to continue (or even expand) QE, but if BB has had trouble communicating the Fed’s message after his lengthy experience, imagine the difficulty a new FOMC will face next year (in the wake of an emerging market blow-up).
–News today includes CPI expected +0.2 both headline and core.  Housing Starts 955k.  FOMC announcement with press conference tomorrow.
–From Bloomberg: “Abe-Bernanke 1-2 Punch Pummeling World’s Top Carry Trade”  Investors who borrowed funds in Japan and then bought the peso to take advantage of Mexican interest rates that are about 40 times higher have lost 11 percent in the past month as the Latin American currency sank. That’s a reversal from the 20 percent return in the first four months of 2013, the biggest in emerging markets…” http://www.bloomberg.com/news/2013-06-17/abe-bernanke-one-two-punch-crushes-carry-trade-mexico-credit.html   This story is emblematic of problems emerging markets have encountered as real rates have gone up in the US.  For example, Brazil’s stocks are making new lows for the year, down over 20%.  Not surprisingly, social unrest in the form of rioting is becoming a problem.

Posted on June 18, 2013 at 5:51 am by alexmanzara · Permalink
In: Eurodollar Options

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