May 4. The Trump effect

–Yields reversed Monday’s rise, with the ten year yield falling around 7 bps to 179.6. The curve flattened, with red/gold ED pack spread in by 2 bps to 76.  One year eurodollar spreads edged lower, with many under 25 bps.  Call it the Trump effect.  Mainstream power-broker republicans are having a hard time accepting the fact that Trump is the nominee.  But according to a graphic on the Chicago Tribune, Trump got 589k votes in Indiana, almost as much as Clinton and Sanders COMBINED, 302 and 334.  Along the same lines, many Fed officials are having a hard time accepting the fact that the market won’t give their rate hike threats any respect.  Yesterday it was Williams (San Fran) and Lockhart (Atl), both indicating that the June FOMC is live.  About as live as Jeb.  June eurodollars closed higher on the day at 9933.5 (+1).  And voting in treasury options was fairly unambiguous, new buying of 15k TYN 131.5c and continued accumulation of TYU 133c, yesterday about 7k bringing the total to 25k.  (TYU settled 130-06).

–At the same time, many economists and central bankers are panning the negative rate experiment.  Yesterday I noted the St Louis Fed blog, and during the day it was Canada’s CB head Poloz, who said ‘Negative interest rates turned out not to work.”  Interesting quote from an investment fund Fasanara Capital: “Picking up carry has been the mantra of the asset management industry for as long as the industry existed.  Today however, as $7 trn bonds are trading negatively, as equities expanded multiples on rising prices and contracting earnings, picking up what is left of carry today is like willfully trading what used to be good yield for illiquidity premium and bad credit risk: a value trap, if not a financial guillotine.”  We have no carry, we have no curve, we have no capex; the gears of modern finance are gummed up.  On the other hand, auto sales rebounded to a 17.4 million rate.
–Plenty of economic data today: ADP expected 193k.  Productivity expected -1.3% from -2.2% with unit labor costs 3.3%.  Non-mfg PMI expected 54.7 was 54.5 last.   Factory Orders expected +0.6 from -1.7%.

Posted on May 4, 2016 at 5:23 am by alexmanzara · Permalink
In: Eurodollar Options

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