Make up

April 17, 2019

–Nasdaq futures at a new high this morning.  China’s Q1 growth better than expected at 6.4% while Germany has cut its forecast for 2019 growth to 0.5 from 1.0%.  It was in late March that a weak German mfg number helped send yields plunging, but TYM is at a new low for April at 122-22+, having completely erased gains.  Yesterday tens rose 3.7 bps to 2.59%.  The eurodollar curve steepened with reds -3.625, greens -4.375, blues -4.875 and golds -5.25.  An article on BBG this morning says that Powell has now “adopted” the inflation make-up strategy that has been repeatedly mentioned in Fed speeches; that is, the Fed will allow inflation to exceed the 2% target to make up for past shortfalls.  I’m not sure the Fed is all-in on the approach, as one of the conditions is that the public must view the plan as “credible” rather than, let’s say, “stupid”.  Mr President, we at the Fed have taken our foot off the brake (and our hands off the steering wheel).  Let’s try the new self-driving technology.   

–In any case, IF the Fed is embracing this strategy, it should be seen as an engraved invitation to steepen the curve.  Could long bond prices become unruly?  Right now, option premium levels suggest not, but I’m not going to be the first one to offer cheap bond puts.  It wasn’t all that long ago that someone had paid up to 10 (if memory serves) for 60k USM 139/140 put spreads.  Now that put spread settled 1 with 140 puts at 4 ref 146-11.  I am more inclined to be a buyer at that level; China’s ten year yield has already broken out to the upside, having rallied from 3.07% to 3.43% in the month of April.  A move of 36 bps in the US long bond contract would be over 6 points lower as a back of the napkin calculation.

–Beige book today. 

Posted on April 17, 2019 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply