Oct 23. Treasury yields drop on weak jobs report.
–Soft employment report sent yields to new recent lows with tens down over 9 bps to just under 2.52. NFP 148k and Avg Hourly Earnings +0.1. Eurodollar calendar spreads made new lows. The peak one-yr spread is now 100 bps (EDZ15/EDZ16 which was down 4). Red/gold also at new low of 259, down over 10 bps.
–Implied vol was likewise hammered. For example, Green Dec 9887 straddle settled 22.5 Monday, the 9900 straddle was sold at 17 just after data (17.5s). The buyer of 25k blue Nov and Dec 9775/9762p strips up to 40 on Friday exited the trade yesterday, from 24 to 17. I marked the TYZ straddle down 0.7 at 4.7, and the atm bond straddle at 7.7 which started October over 10%. Most euro$ option trades appeared to be exits; probably still a bit more behind.
–This morning there are several articles about upcoming ECB stress tests on banks, which are supposed to be completed by Oct of 2014. Of more immediate importance are large write offs of uncollectable debt by some of China’s banks, (BBG) “China’s biggest banks tripled the amount of bad loans written off in the first half, cleaning up their books ahead of what may be a fresh wave of defaults.” Also, the repo rate in China is up this morning in what may be a fresh attempt by the PBoC to stem inflation. Asian stocks are lower this morning, and in another DIS-inflationary piece of news for the US, crude oil is down about $1.
–TIC data was released yesterday, expected inflow of $30B was actually an outflow of $9B! I didn’t go through details but Bloomberg notes a big outflow in foreigners’ US equity holdings (-16.9B) and net selling of treasuries. Big picture take-away seems to indicate selling at the lows (August was a down month in both stocks and bonds), and chasing on subsequent rally…
