May 19. Don’t ignore flattening curve

–Earlier this year Brazil’s Bovespa index reached a five year high.  Yesterday it was down 8.8% on political turmoil involving bribery reaching the highest levels of gov’t.  Just a small reminder of risk.  In the US interest rate market, changes were much more nuanced.  However, it worth noting that back eurodollar spreads edged to new lows, as the red pack (2nd year out) was the weakest part of the curve -3.5.  Red/gold pack spread fell 1.25 and is now below 65 bps. Red to green pack spread (2nd to 3rd year) lost 0.5 bp to close 26.5.   2/10 treasury spread sits just above 97 bps.

–A flatter yield curve isn’t particularly encouraging for the function of financial machinery.  We still live in a ‘borrow short/ lend long” world. While US stocks were able to bounce a bit, some of the financial indexes look sick.  For example, KRE (regional bank index) and XLF (large financial services) are both pretty much near lows for this calendar year.  (This in spite of Mnuchin yesterday saying the admin does NOT support a separation of banks from investment banks).  July FF are bouncing around between 9890/94, closing yesterday at 9892, 73% chance of hike in June.

–Trump is off to the middle east this weekend.  Today’s news includes comments by Bullard at 9:15 and Williams at 1:40.

Posted on May 19, 2017 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply