Oct 24. Technical yield levels reached; bonds should consolidate here
–Follow through yesterday; the curve continued to flatten, implied vol under pressure. New lows in most one-year calendar spreads in euro$’s, with the highest spread now under 100 bps (EDH16/H17 at 97.5). Huge outright buy orders came into EDZ15 and EDH16. Total open interest in euro$’s was up over 100k, 40k alone in EDU15, EDZ15 and EDH16.
–New low in red/green pack spread at 73.5, -2.875 on the day, as red pack settled -0.625. In the bigger picture (looking backwards), reds/greens ended April around 30 bps, just prior to taper/tighten fears. By September it reached 109, but that was just after a contract roll. So I would say the rally was from around 27 to 103. Fib retracements are 74 (.382) and 65 (50%), so we are right at 38% at 73.5. (Ten year 38% yield retrace is 247; closed yest 248). So we’re in an area of price resistance. Now, looking forward, why the pressure on reds in the face of massive buying of first 2 greens? Perhaps related to spread compression, but also might be somewhat related to ECB stress tests? These tests are supposed to end in October 2014. Draghi said yesterday that banks that should fail, will fail. Going into Q4 of next year it may well be that EU banks need to raise a lot of capital. Could that possibly weigh on Dec’14 and Mar’15 contracts?
–Obamacare individual mandates may be postponed. Uncertainty moved forward, just like budget negotiations.
–Interesting story in Washington Post about Saudi relations with the US reaching a cracking point. http://www.washingtonpost.com/blogs/post-partisan/wp/2013/10/23/the-u-s-saudi-crackup-hits-a-dramatic-tipping-point/
The article mentions several times that the US is increasingly seen as unreliable in the region, not just by Saudi Arabia, but by Israel, Jordan, UAE and of course, Egypt. It almost appears to be a strategy of neglect in the region, now that US energy production has been ramped up. However, increased instability could cause problems down the road.
–News today includes Internat’l Trade, Jobless Claims exp 335k, and PMI.
