March 5. Oil and the US long bond

“The downward pressure on China’s economy is intensifying,” Li told around 3,000 delegates gathered at the Great Hall of the People to the west of Beijing’s Tiananmen Square.

–It’s all about China today, as Li shaved the growth target to around 7% and signaled a wider budget deficit. In Yellen’s semi-annual testimony last month, China was mentioned specifically, “In China, economic growth could slow more than anticipated as policymakers address financial vulnerabilities and manage the desired transition to less reliance on exports and investment as sources of growth.” [“Investment” Like building empty cities] The best summary is this link to AEP, ‘Liquidity evaporates as China’s fiscal cliff nears’
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11450691/Liquidity-evaporates-in-China-as-fiscal-cliff-nears.html

–In US interest rate markets yesterday there were little net changes. However, there was slight steepening between 5/30 and 5/10 treasury spreads. The long end of the US curve continues to trade heavy. On a fundamental basis, I think the US economy is slowing and the continued strength of the dollar is like a big wet disinflationary blanket. However, in terms of price action, the long bond is simply weak. Note on the enclosed chart the (short term) mirror image between crude oil and USM. Oil bottomed in late January, the bond topped. Yesterday, in spite of new highs in the dollar index, oil closed up over a dollar and the bond contract was weaker. Just something to be aware of…

USM v CL1

 

–The big trade yesterday was a new seller of 55k midcurve September 0EU 9837.5p 19.5 to 18.5, mostly covered against red pack futures with 40 delta. This premium selling caused a lower vol adjustment through the curve, with red mid straddles dropping a bp or so. Interesting in that it came just in front of tomorrow’s employment report.

–While many central banks cutting rates, Brazil raised to 12.75%, a six year high, to curb inflation. The Fed’s posturing for rate normalization is taking its toll across the world and is, of course, hurting US exporters. If non-domestic issues were to intensify and forestall Fed tightening, the US curve could steepen violently sparked by a mad scramble to exit flatteners.

Posted on March 5, 2015 at 5:16 am by alexmanzara · Permalink
In: Eurodollar Options

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