May 11. Fed to tighten this year? Dunno
–The employment report was disappointing to bond bears, with nonfarm payrolls up 223k and average hourly earnings only +0.1%. Though the data wasn’t far from published expectations, the market was obviously leaning short and there was immediate short covering. Yields were lower across the board with tens dropping 3 bps to 214.4. Open interest in eurodollars as a whole was down 94k and in TY was -13k though mixed in other treasury futures. Unsurprisingly, implied vol was spanked.
–The idea of near term Fed hikes seems to have evaporated. June/Sept eurodollar spread notched a new low of just 11 bps. June/Sept Fed Fund spread, which I had recommended buying at 7-7.5, ungraciously settled at 5.5. January 2016 Fed Funds once again settled at 9962.0, up 3.5 on the day and just 25 bps lower in price than May 2015 FF, indicating just one hike for 2015. October’15 FF at 9976.5 are forecasting less than 50/50 odds of a hike at the September meeting. “Don’t fire until you see the whites of their eyes”.
–China however, has no such problem in changing rates (otherwise known as lift DOWN) and this weekend chased the plunge in shibor by cutting the 1-year lending rate by 25bps to 5.1% and the 1-year deposit rate to 2.25%.
–Worth mentioning is that Greens (3rd year) were the strongest on the eurodollar curve Friday, settling up 10.125, but things steepened from there, with golds (5th year) up only 4.75. The 5/30 treasury spread continues to show strength, closing near the recent high at 140.5. Beware the back end of the curve…in both directions. We may see a tight range trade over the next few sessions, but there’s an undercurrent of instability.
