June 4, 2015. Greenspan put RIP

–Rates continued their march higher, with tens up another 10 bps to 236 (239 this morning).  Moves from Friday’s close have been eye-popping:  US Tens up nearly 1/4% from 212 to 236.  Bunds up a whopping 39 bps from 49 to 88 (and 99 this morning!).  Same story in back month euro$’s, for example EDU8 closed at 97.78 Friday and 97.485 yesterday, 29.5 bps.  Even what had been relatively tame calendar spreads had large moves.  Dec’16/Dec’17 euro$ spread has seen notable volume.  On Friday it was 56.5, but closed 69 yesterday.  Adding fuel to the fire Draghi said “Markets must get used to periods of higher volatility.”
–Though the Fed has been continually emphasizing the idea that rate hikes will be gradual, there seems to be a subtle shift in central bank communication, (perhaps not so subtly by Draghi, but more so by Fischer), that markets may again become the vehicle for price discovery, that the change may be messy at times, and that central banks shouldn’t be expected to step in at every sign of stress.  That’s a huge change.  Can we extrapolate to say that perhaps the Greenspan/Bernanke “put” is no longer in place?

–With the employment report looming Friday, and bonds already having seen huge declines, the psychology becomes interesting.  “How can I sell now?  It’s already WAY overdone and if jobs data are weak we’ll have a complete turn around.”  Note: It’s NOT that the Fed moved up its tightening schedule.  January 2016 Fed Funds were unchanged at 99.60, indicating one hike by the end of the year.  This is driven by the long end, and the authorities may have lost control.  I’m sure the TV commentators will say the ‘safe’ things…that this bond rout will provide a buying opportunity in stocks.  That German yields had become too low and this is all driven by Greece and is a normal correction…has very little to do with the US.  But Japan’s yields are pushing higher as well, to 49 bps, the highest level of the year and through a downward sloping trend line in place since 2013.  The mentality of capturing a few straggling bps of extra yield has just been crushed.  Everyone that needed to buy bonds (except the ECB) has already done it.
–The dollar index declined yesterday as the EUR surged to 112.70 (and 113.50 this morning).
–Today’s news includes Nonfarm Productivity expected -3.0% and Unit Labor Costs for Q1 expected 6.1.  Jobless Claims expected 278k.

 

Posted on June 4, 2015 at 5:17 am by alexmanzara · Permalink
In: Eurodollar Options

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