Nov 17. If things are great then why is the treasury curve flattening?

–Japan again in recession as GDP falls 1.6% with the Nikkei falling 3% and the possibility of snap elections.  Japan equity weakness has spilled over into other markets, with SP’s lower and treasuries higher.  However, there seems to be some “sell the fact” profit taking in $/yen near 117… now 116.26.
–Yields fell Friday with the ten year down nearly 3 bps to 231.7, a carbon copy of the previous Friday.  Friday to Friday change: Ten year yield 231 to 231.7.  TYZ4 126-22 to 126-21.  2/10 181 to 181.  Last Monday morning the high for the week in TYZ was set at 127-005.  This morning’s high so far is 127-00.
–Actually, 2/10 spread did close just under 181 Friday, eking out a new low.  5/10 treasury spread is also at its low for the year at 71.5.  This level is the 50% mark from the low of 2006 at 6.6 to the high in 2011 of 149.  The trend of this year has been that important support levels that have been tested a few times (oil at $80 and gold at $1200) tend to dramatically give way.  I wouldn’t be surprised to see 5/10 approach 50 bps by year end.  The question is, why does the treasury curve continue to flatten if we are to accept the stock market’s message of a robust economy?  Peak one year euro$ spreads were between 110 and 120 earlier in the year.  On Friday there was good buying in EDZ5/EDZ6 at 100 to 100.5, but it fell back to close at just 97 bps.  Again, interest rate markets have a much more subdued view of economic growth and likely Fed activity going forward.
–Having said that, interest rate markets closed at their extreme levels for the year at the end of 2013.  Tens were 304.  Now the 30 year bond is at that yield.  Maybe the end of 2014 will mark the low point.  Even though the official unemployment rate has dropped to 5.8% I see more and more 20-something panhandlers on the streets of downtown Chicago than ever.  What am I going to believe?  Gov’t stats or my own eyes?
–The market is afraid of an asset price spiral lower in Europe.  There is obvious fear that EURCHF peg is going to break with the Swiss gold referendum.  Look at the stocks of European banks.  Credit Suisse is down 25% from the year’s high.  DB is down 40%, looks like the ten year yield chart, inexorably lower over the year.
–Today’s news includes Empire State expected 10.3 and Industrial Production 0.2% from 1.0.  Fed minutes are Wednesday, which should shed clues about the hawkish statement which was released on Oct 29.

Posted on November 17, 2014 at 5:18 am by alexmanzara · Permalink
In: Eurodollar Options

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