Long end moving to center stage

July 12, 2019

–Yields rose Thursday as inflation data were slightly more firm than expected with Core CPI mom 0.3 and yoy 2.1%.  However, the curve continued to steepen with 2/10 up 3.5 bps to 27.1.  The flattening move related to the strong payroll report last week has been completely reversed.  The market is accepting the idea of a rate cut at the end of this month of 25 bps (FFN/FFQ settled  -29.0) and probably another cut in September (FFQ/FFV settled -17.0) but confidence in the longer part of the curve is wavering, as evidenced by the 30 year bond auction yesterday.  I’ve attached a couple of charts of 5/30 treasury spread.  The top shows that a long term downward-sloping trendline in place since 2014 was broken this year.  The sell off associated with Friday’s NFP just re-tested the trend, and 5/30 is now near a new high for the year.  The second chart shows a shorter time frame; the low of 33 bps was made in December and it’s been moving higher ever since.  I marked the spread at 76.5 at futures settlement yesterday, up 4.5 on the day, but the chart shows a later price of 80 as the bond yield rose 6.9 yesterday to 2.64%.   The bottom chart shows the thirty year yield, which bottomed at the beginning of the month at  2.47% and has since surged 18 bps.  

–On the eurodollar curve, EDU9/EDU0 and EDZ9/EDZ0  posted new recent highs of -40.0 and -31.0 (both +2 on the day).  Therefore, the idea of a more aggressive and concerted easing cycle is losing adherents.  it seems now like the market is in the mindset of a few “insurance” cuts and let’s see what happens.  And let’s see if the US can easily continue to sell debt as supply increases. 

–PPI data today.  Also, storm Barry is threatening huge damage to New Orleans.  Katrina was in August of 2005.

long term 5/30 chart
one year timeframe, 5/30
thirty year yield
Posted on July 12, 2019 at 4:51 am by alexmanzara · Permalink
In: Eurodollar Options

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