May 30. Treasury rates remain low on European fears

–Once again US interest rate contracts closed firm.  EDZ1/EDZ2 spread (Dec/Dec) has closed at a new low for seven straight sessions, ending Friday -1 at 74.5.  It started the month around 102.
–The situation in Greece is again front and center, but going into the next few weeks there are high profile US events as well: QE2 is scheduled to end and the fight over raising the US debt limit will heat up.
–All over the world gov’ts have substituted government debt (backed by taxpayers) for private bank debt.  And neither taxpayers nor those receiving gov’t transfers care for the implications of getting less. But what started as uneasiness is boiling over as the reality of austerity bites.
–Dec corn closed at a new high Friday.  There was an interesting piece late last week that China is going to release water from the Three Gorges Dam to replenish the Yangtze river, mostly for agricultural reasons.  However this action will also detract from hydro-electric generation, thereby increasing demand for oil imports.
–Caroline Baum from Bloomberg wrote an opinion piece saying that yield curve steepness makes recession extremely unlikely, using FF vs ten yr treasury yield as her measure, “…one rate is artificially pegged by the central bank while the other is determined by the market. Their relationship encapsulates the stance of monetary policy. When the yield curve is steep, as it is now, it’s an inducement for banks to expand their balance sheets — borrow short, lend long — and increase the money supply.”
My only problem with this argument is that it’s wrong.  Both rates are being artificially pegged, and in spite of the curve banks are not lending into the market, but to the government.  Velocity remains stagnant, having plunged over the past three years.  I’m not saying recession is likely, but I would be wary of using the curve as my only indicator in a zero rate environment.

Posted on May 29, 2011 at 4:35 pm by alexmanzara · Permalink
In: Eurodollar Options

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