May 4. Bearish sentiment shift in bonds/curve
–Friday capped a big week in interest rate markets, with the curve steepening to new recent highs and implied volatility surging. Almost all eurodollar calendar spreads made new highs. For example, the red/gold euro$ pack spread rose 4.375 Friday to 131.375, up nearly 12 bps from the previous Friday. 2/10 treasury spread ended the week at 151.3, up over 11. The peak one-year eurodollar calendar is Dec’15 to Dec’16, which closed at 79.5, up 3 on the day and 9 on the week. Implied vol rose sharply on Friday as futures sold off. Previously, sell offs in the futures had been associated with steady to softer vols. Fear has now shifted to the downside. For example, one week ago I marked June US vol at 10.8, versus 13.4 on Friday.
–Sentiment has very clearly changed. The catalyst might have been the sell off in German bunds. There is also concern that any hike by the Fed may spur volatility. For example, a monetary policy meeting held by China, Japan and South Korea concluded, “In an uncertain environment of global economy, monetary policy settings should be carefully calibrated and clearly communicated to minimize negative spillovers” (Reuters). In other Asian news, Bloomberg reports that S Korea is closely monitoring the yen/won rate as Korean exporters have lost market share to Japan.
–Big week ahead with the Employment report on Friday. Last week’s Jobless Claims were at the lowest level in 15 years, so the market may already be discounting a strong payroll report. However, note that the Atlanta Fed’s GDP Now forecast for Q2 is only +0.8 as of May 1. Today’s news include Factory Orders, expected +2.1%.
