June 7. Bernanke before Congress…Yellen sketches the outline for BB to color in

–Bernanke speaks before Congress on the economy today.
–Equity markets were cheered yesterday as WSJ’s Hilsenrath broke the story that the Fed was considering further easing, articulated last evening by Janet Yellen who advocated more support for the economy through balance sheet actions. Another positive factor was a rumored plan for Germany to provide aid to Spain’s banks. So the stage is set for BB to save the world with monetary policy (yet gold is lower this morning, somehow having given up all of yesterday’s gain). All this in spite of a Beige Book that painted a picture of a growing economy.
–The back end of the curve fell, with tens up 9 bps to 1.65%. Red/gold pack spread surged 9.5. The curve steepens as the Fed considers more bond buying; the market knows it’s all about keeping stocks up. It’s really quite amazing that at record low yields the central bank wants to add to its bond holdings to help stocks, while corporate profits are already at a RECORD percent of GDP (which should be a compelling factor in stock market valuation). Perhaps the Fed should simply be an unlimited seller of 1.75% strike puts on the ten year and abandon the promise of low rates at the front end.
–I saw a couple of clips this morning about widening indications of weakness in China, including lower steel consumption and channel stuffing of auto dealer inventories. (Yet another problem that can be helped with easier US monetary policy in the eyes of our chairman).
–With just over one week to go, midcurve red June 9937 straddle is 6. With three months to go, the Sept midcurve settled yesterday at 14.5. Decay of only 8 bps over three months…

Posted on June 7, 2012 at 5:38 am by alexmanzara · Permalink
In: Eurodollar Options

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