June 3. Beware the bond bear

–Bond markets were hammered yesterday as eurozone inflation increased more than expected with yoy Core CPI +0.9.  US ten year yield jumped another 7.4 bps to  226.4.   Curve was again steeper on the dollar curve, with red/gold euro$ pack spread up 7.375 to just under 145 bps.  Heavy buying in EDZ6/EDZ7 one year spread, which closed up 4 bps on the day at 64.0.  Nice roll on this trade as the one-yr spread in front, Sept16/17 is 72.
–The market appears to be shifting towards a GLOBAL bond bear.  Even JGB’s are 43 bps, up 8 bps on the month, and through a long term trendline.  Implied vol remains somewhat subdued however.  I marked Sept TY vol unchanged at 5.8.  The premium sellers have been programmed to fade every bounce.  That strategy is long in the tooth.  Almost every day there are articles bemoaning lack of liquidity.  Lack of liquidity in a bear market equals higher vol and wider spreads.
–Interesting article on Business Insider noting heavy bond issuance driven by share buybacks and M&A>
http://wolfstreet.com/2015/06/02/last-two-times-this-happened-stocks-crashed-record-m-a-boom-share-buyback-boom/#ixzz3bzUa3T8j
“Bond issuance has totaled over $100 billion per month in the US for the past four months, the longest such streak ever, according to Bank of America Merrill Lynch.  And that record issuance doesn’t account for the booming “reverse Yankee issuance,” where US corporations take advantage of the negative-yield absurdity Draghi has concocted in Europe and issue euro-denominated bonds…”

“In April, S&P 500 companies announced an all-time record of $133 billion in buybacks. It’s attracting the ire of the largest money managers in the world.”

Posted on June 3, 2015 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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