June 3. Hindenburg omen for stocks, support for treasuries?

–There was record volume in interest rate futures Friday as the ten year note yield rose 4.5 bps to nearly 217 (at 2:00pm floor close). As the floor session for interest rates was closing, stocks began to sell off, in part due to index rebalancing, and TY rallied half a point to the 129.5 strike.  The ugly close in stocks may provide some support for fixed income this week.  In the last hour ESM plunged 20 handles to 1626.25 low.  Several sources cite an appearance of the Hindenburg omen, a possible crash signal.  http://www.businessinsider.com/the-hindenburg-omen-has-appeared-2013-5
–US stocks may also take their cue from the Nikkei; the futures index started May at 13750, rallied 16% to 16000, but collapsed in the last six sessions to close around 13450.
–In spite of extraordinary volume, open interest was down across the treasury complex, with fives -58k, tens -35k, bonds -26k (mostly due to roll, but still somewhat significant). Total OI in euro$’s was up 60k.
–Implied vol is rising.  When ten year yield hit 2.40 in March 2012, TY vol spiked to 6.75, vs around 5.5 now.  There is some talk that the 2.20 yield forces MBS negative convexity hedging, which seems apparent from trade action. It may be a more active June than usual, as the middle of the month has FOMC with press conference (19th) and a G8 meeting (17th-18th).  This Friday employment data is released (to the general public).  Obama will learn about it from watching newscasts.  Today’s news includes PMI and ISM, expected 51 from 50.7.  Fed’s Williams speaks.
–The curve steepened, with nearly all euro$ calendar spreads making new highs.  Red/gold pack spread up nearly 7 bps to 195.75.  (High last in March ’12 was around 200 corresponding with 2.40 in tens and 3.50 in bonds).  I marked 2/10 at 186.
–I am not sure how to assess the importance of the following, but ZeroHedge and BBG ran stories on Sallie Mae’s plan to split the company in two, sort of a good bank/bad bank deal, with current bondholders secured by the bad bank.  Sallie is the student loan agency; SLM 10 year paper sold off several points to yield 6.02% on the news.  The bad bank will have the servicing rights to gov’t guaranteed loans (slow or no growth) and also the current unsecured loan portfolio, while the “good” part is going to focus on making higher yielding (>10%) private loans.  Ratings agencies downgraded the debt.  The takeaway for me is that the BELL HAS RUNG for the “reach for yield” mentality.  Currently there is $1T student debt, $850B guaranteed by gov’t.  Again this year in July, the rate for gov’t student loans is set to double from 3.4% to 6.8%.  The administration has proposed a plan of market rates plus 0.93 spread, or currently around 3.1% given the ten year, fixed over the life of the loan.  The House plan is the ten year plus 2.5% and floats every year. Certainly there will be another “last minute” save, but the market action and downgrade of Sallie bonds is indicative of a large gov’t subsidy (given delinquency rates), and perhaps another sign that government (whether the Fed or the administration) setting of rates is likely to eventually cause problems.




Posted on June 2, 2013 at 9:36 am by alexmanzara · Permalink
In: Eurodollar Options

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