March 31. Long bonds are uncomfortable with Yellen’s dovishness

–One of Yellen’s points Tuesday was that, as market perceptions of the trajectory of the Fed Funds rate becomes less steep, bond rates and mortgage rates come down, providing support for the economy.  Yesterday, the five year note yield declined, but the 30 yr bond rose 4.5 bps.  5/30 treasury spread hit a new monthly high just above 139. 2/10 also edged to a new high at 107.  Red/gold pack spread jumped 4.5 bps to a new recent high of 1.375.  In the initial aftermath of the Fed’s dovish lurch, the long end has become suspicious that the Fed Fund trajectory might become too shallow, thus undermining the dollar and strengthening inflation undertows.
–The euro is trading right at the top of this year’s range at 113.64 and is threatening a further breakout in spite of Draghi’s QE program.  Certainly the Fed has complicated things for the ECB and BoJ, both of whom have pursued a path of currency depreciation against the USD to support exports. (What now? Go more negative and destroy the banking system?).  On the other hand, EM currencies benefit from stronger commodity prices, and CNY further strengthened today to 6.4626.   However, the FT reports that Guosen, a state-owned brokerage in China is defaulting on a ‘dim sum’ coupon payment.  “At their most basic level, dim sum bonds are bonds issued outside China, but denominated in renminbi, rather than the currency of the country where they’re issued. (BI)”.  The assumption has apparently been that parent companies would cover the problems of off-shore units, so this action shades that notion.  I would have to put this in the “red flag” category.
–Once again, I would note that there’s barely a basis point between calendar spreads further out the euro$ curve.  Yesterday red/green pack spread settled 27.75, green/blue 27.0 and blue/green 26.625.  While vol continues to be crushed, the blue midcurve straddles still trade at a 1-2 bp premium to greens.
–Today’s news includes Jobless Claims and Chicago PMI, expected to rebound to 50.3 from the dismal 47.6 last time.  Oh, and here’s more good news for Chicago: (Tribune) “As the first quarter of 2016 nears an end, violence in Chicago has reached levels unseen in years, putting the city on course to top 500 homicides for only the second time since 2008.”

Posted on March 31, 2016 at 5:13 am by alexmanzara · Permalink
In: Eurodollar Options

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