Quick notes
November 18, 2019
–China trimmed its key 7-day repo from 2.55% to 2.50%, a small sign of easing. Today the Chicago Fed national Activity Index released, expected -0.50 from -0.45 last. The low was in April at -0.84, but weakness has persisted through the year. While stocks look to start the day higher, gold is currently down $10, below 1460, near the low of the month.
–Uneventful close of November midcurves. Dec treasury options expire Friday. Open interest favors puts, with 129p at 76k (12s), 128.5p 90k (4s) and 128p 125k (1s). On the call side the 129.5c have 67k and 130k 90k. I would surmise a slight bias for lower prices.
–After the announcement late Thursday of term repos over the turn of the year, EDZ9 to FFF0 spread eased to 36.0 on Friday, down 2 on the day, with EDZ9 up 1 and FFF0 down 1. EDZ9 9812.5 straddle settled 7.5. The market is fairly confident the Fed has taken appropriate measures to suppress year-end funding pressure, which encourages vol sellers across the curve.
–After Retail Sales and Industrial Production data, the Atlanta Fed cut its GDPNow Q4 forecast to 0.3%, a new low.
Deer (in the headlights) season
November 17, 2019 – Weekly comment
In the beginning of November, the Atlanta Fed’s GDPNow Q4 estimate was 1.5%. On Friday, with the release of Retail Sales and Industrial Production, that estimate was downgraded to 0.3%. Real personal consumption expenditures and gross private domestic investment decreased from 2.1 and -2.3 to 1.7 and -4.4%.
The NY Fed’s GDP Nowcast estimate for Q4 was as high as 1.96% in late September, but has been continuously revised lower and, after Friday’s data, was cut to 0.39%. The extra digit of accuracy is a nice flourish out of the NY Fed, amusingly giving the illusion of econometric precision.
Cass Transportation reports that North American freight volumes printed negative yoy for the 11th straight month. The decline in October was -5.9%. From the report, “…we repeat our message from the previous five months: the shipments index has gone from ‘warning of a potential slowdown’ to ‘signaling an economic contraction.’ …demand is weaker across almost all modes of transportation, both domestically and internationally. …Several key modes are suffering material increases in the rates of decline, signaling the contraction is getting worse.”
China’s auto sales fell 5.8% yoy in October. Sales growth has been in negative territory every month since June 2018. Global auto sales are on track to decline for the second consecutive year.
US stocks have soared to new highs.
On the week, the US ten year yield fell nearly ten bps from 1.928% to 1.831%. The curve flattened, with twos down only 5.2 bps to 1.61%. Inflation data were about as expected in the middle of the week with yoy Core CPI +2.3%.. Late on Thursday, after Powell went out of his way in Congressional testimony to say that the Fed did NOT want to control the FF rate “…through frequent interventions to actively manage the supply of reserves”, the Fed intervened with the announcement of 28 and 42 day term repos, to hopefully get the market over the year-end finish line without repo drama. Though Powell said that recent t-bill buying and repo operations did “not represent a change in the stance of monetary policy”, constant tinkering indicates that the Fed doesn’t have as strong of a stance on monetary policy as they would like you to believe. On Wednesday, the Oct 30 FOMC meeting minutes are released, and we’ll get a better sense of the case for a December pause.
As of Friday, the market is accepting the idea of a December lull, and has expressed confidence that the Fed will do whatever it takes to make funding available through the end of the year. EDZ9 closed at 98.10, exactly at the November contract level (EDX9), which settles to libor on Monday morning. The 98.125 straddle settled 7.5, down from 9.0 the previous Friday. The spread between EDZ9 and FFF0 settled 36.0, at the low end of the recent range. At 98.46 or 1.54%, the January 2020 FF contract is just 2 bps higher than the front November FF contract, so there’s only a minuscule ease possibility being priced.
Sometimes you just need a picture or a chart to capture the essence of the situation. This is an actual Traffic Collision Report from the Kenosha, WI Police Department, submitted by an officer tasked with making a diagram of the incident.
That deer could be the Fed confronting the reserve shortage. The car is cruising along like the stock market.
There was a time when the Fed wanted to break the economy’s dependency on asset inflation. There was a time when Fed officials talked about ‘normalizing’ rates. Here’s the message the stock market is now hearing: “The Fed will continue to inject liquidity which we will use to compress risk premium. The Federal government will ramp up economic support for Trump’s re-election, including a subpar Phase I agreement. If the Fed won’t overtly cut FF, we’ll just buy further out the curve in anticipation of total acquiescence.” Caught between the headlights. And the indexes make new highs.
I was going to write a bit more, but the whole investment landscape boils down to Druckenmiller’s observations: “…focus on the central banks and focus on the movement of liquidity. Most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”
Since I’m on the whole deer season thing, I’ll end with another timely picture (The Far Side).
OTHER MARKET/TRADE THOUGHTS
December treasury options expire on Friday. There will be lots of wing replacements, probably in February or March options. Something like buys of TYG 123 puts for 1/64th. Vol is once again cheap.
As I had mentioned during the week, Eurodollar risk reversals unsurprisingly continue to reflect much more concern about market events that will cause a plunge in short rates rather than an increase. On Friday, EDM0 settled 9840, EDM0 9862.5c 7.0 and 9812.5p 2.25. While the 9812.5 put is 27.5 out of the money, the call of equal premium (2.25) is the 9900 strike, 60 bps otm. The 9862.5 strike needs at least two Fed rates cuts to play.
Despite this week’s rally, bonds still look as if the longer term test will be higher yields. Vol on USH0 is again below 8%, near the low end of the recent range. At the end of the week Lagarde gives her first speech as head of the ECB and European bond yields have already been perking up. A surge in long end yields would be an appropriate challenge for the ECB.
| 11/8/2019 | 11/15/2019 | chg | |
| UST 2Y | 166.2 | 161.0 | -5.2 |
| UST 5Y | 173.1 | 164.8 | -8.3 |
| UST 10Y | 192.8 | 183.1 | -9.7 |
| UST 30Y | 241.4 | 230.8 | -10.6 |
| GERM 2Y | -61.6 | -63.3 | -1.7 |
| GERM 10Y | -26.3 | -33.4 | -7.1 |
| JPN 30Y | 44.9 | 44.5 | -0.4 |
| EURO$ Z9/Z0 | -27.5 | -36.0 | -8.5 |
| EURO$ Z0/Z1 | 1.5 | -2.0 | -3.5 |
| EUR | 110.19 | 110.53 | 0.34 |
| CRUDE (1st cont) | 57.24 | 57.72 | 0.48 |
| SPX | 3093.08 | 3120.46 | 27.38 |
| VIX | 12.07 | 12.05 | -0.02 |
In: Eurodollar Options
FED IMPLEMENTS POLICIES TO HELP TRUMP’S CAMPAIGN!
November 15. 2019
–This morning it’s all about US/China Phase I, with Kudlow setting the table tor a deal. Stocks have surged to new highs. Timing’s right for a December signing and the tease of further progress. Bonds also surged yesterday, with tens -6.1 bps to 1.813%. Euro$ contracts from EDH21 through the golds were up 5 to 6 bps. Near calendar spreads declined, for example, EDH0/EDH1 fell 3.5 bps to -21.0. Powell is assuring the market of liquidity, driving up odds of renewed rate cuts. December is pretty much priced for a pause (thus limiting the rise in near contracts) but the back end floated higher.
–The Fed yesterday afternoon announced 28 and 42-day repos to get the market over the turn. In 1999, where there were genuine fears of a turn meltdown due to Y2K, the Fed addressed the problem early. The Aug 24, 1999 FOMC minutes show that the Fed approved “a temporary financing facility authorizing the NY Fed to sell options on repo agreements” to cap funding costs for dealers. From a footnote in a Fed paper of Oct 2013: “In the months leading up to Y2K, the Fed sold options that provided dealers with the right to obtain overnight repos from the Fed over specified periods at a rate set 150 bps over the target fed funds rate.” Why am I bringing up Y2K? Obviously the Fed is quite nervous about this year’s turn and is sloshing out the liquidity. The Fed is relying on repo ops and balance sheet explosion to hold down a rate which, if left to its own devices, would lay bare the facade of enormous funding pressure. As Zoltan Poszar of CS recently said, ‘the world is funding itself overnight’. And it’s a LOT of funding due to the increase in treasury supply. It’s a little like WeWork, we’ve committed to borrow long (WW lease obligations) but our client base is a fickle group that leases from us short term (funds o/n). I’m not saying that date mismatches can cause problems. Central banks can hold things together. Like the SNB with the EURCHF peg. : – /
–It’s shaping up to be an interesting year-end. Stocks understand the liquidity that the Fed feels forced to provide, and relish the extra kicker from a US/China deal that needs to be teed up and then extended for election purposes. The Fed is helping Trump, but I’m sure even Dudley would say, they have no choice. It’s the institutionalization of future destabilizing factors.
–From Cass transportation which tracks shipping: “…we repeat our message from the previous five months, the shipments index has gone from “warning of a potential slowdown” to “signaling an economic contraction.” Of course, it’s really hard to gauge how important that could possibly be, because these shipments are just of ‘things’ and not of the important economic stuff like ‘data’. I’ll just leave you with another snippet that I learned on the elevator monitor as I was going to work yesterday (all the BEST news is in the elevator). And it relates to the morally green outrage of our youth… “in a typical year, gamers in the US alone use about 33-34 terawatt-hours of energy. Breaking it down into easier terms for those of us who aren’t electricians, that’s 2.4% of all electricity in residential areas, which makes the CO2 output greater than 5 million cars.” [I did not try to check the veracity of the gamer thing. It was in the elevator. It has to be true] Yes, I’m outraged too. But I productively channel it. In a bar.
There’s a bias toward ease; are option markets overpricing?
Nov 14, 2019
–On a day filled with events and news, trading was subdued. Yields fell with tens -3.6 bps to 1.874%. The curve edged slightly flatter. Red euro$ pack (2nd year) settled +4.75 while greens through golds were +5.0 to +6.0. Stocks started the day lower but were able to close positive, as Powell said the neutral rate might even be lower than the Fed suspected, and deemed the recent liquidity surge to juice reserves nothing more than a technical trifle. (’tis but a scratch).
–Inflation data was softer than expected with core yoy CPI 2.3% vs 2.4 expected. The NY Fed released its Underlying Inflation Gauge (UIG) which also showed a small decline in the “full data set” to 2.3%. However, the report also says, “The gap between the two UIG measures continues to narrow. Trend CPI inflation is estimated to be approximately in the 2.1 to 2.3% range.” [ Sounds like the NY Fed thinks we’re AT target ]. The budget deficit for the first month of the 2020 fiscal year was released at a whopping $134.5 billion after having closed out fiscal 2019 at $984 billion. Oh, Powell also hollowly admonished the gov’t on its profligacy, while supporting it with policy.
–A couple of select trades and prices reflect the market’s sentiment, leaning toward lower rates with no fear of the downside. EDM0 9850/9875/9900 call fly bought for 2.5 covered 9836.5. This one needs a couple of more eases to end in the money. EDU0 9862/9887/9900/9925 broken condor also bought in 20k for 2.5 vs 9840.5-41. As we say in Chicago, “couple, two-tree” eases needed for that one too.
–EDM0 settled exactly at 9837.5. The 9800p, 37.5 away, settled 1.25 while the 9875c settled over 3.5x higher at 4.5. This, of course, makes call flies “cheap”, as, for example, the 9825/9800/9775 P fly settled 4.75 while the 9850/9875/9900 C fly settled 2.75. So, some are jumping on call flies, while others look to fade this pricing as the Fed tries to hold the line on additional easing. Here’s a fade: a new seller of EDU0 9800/9875 risk reversal at 5.5 ref 9841.5. The call settled 8.5 and the put at 2.75 vs EDU0 9843.0 settle; open interest up 80k in puts and 73k calls. Look, near term FF contracts have priced at MUCH lower odds of further Fed cuts. Example, FFJ0 (with 3 FOMCs beforehand) is only 9853.0 or 10 bps premium to FFX9. I.e. FF are not indicating aggressive ease, but the risk reversals reflect that fear. Hmmm.
–Germany narrowly missed falling into a technical recession with Q3 GDP +0.1%. China data was soft with Fixed Asset Investment at 5.2% vs expected 5.4%, said to be a “key driver of economic growth” (RTRS) and the weakest since 1996. US news includes PPI today followed by Retail Sales tomorrow. More Powell. (sorta rhymes with cowbell).
Risks building for stocks and bonds
November 11, 2019
–Hang Seng down 2.6% as violence in Hong Kong escalates and Shanghai Comp -1.8%. US stock futures also point to a lower open on this holiday session and bonds are seeing a very modest bounce.
–Curve continued to steepen Friday with 2/10 posting a new high at 26.6. Twos fell 1.1 bps to 1.662% and tens rose 1.1 to 1.928%. Red/gold pack spread in dollars edged up by 1.125 closing at a new recent high of 20.25. Bloomberg ran a story identifying an increase in ‘term premium’ relating to last week’s bond sell off. Anyone else can just take a casual glance at prices and say, ‘we sold off’. Maybe the Fed buying t-bills and the treasury auctioning long bonds has something to do with the steepening? Nah.
–In front of Powell’s testimony before Congress this week, the market has become comfortable with the idea of a pause or a possible end of the rate cut cycle. Jan’20/Jan’21 FF calendar is -19.0, no longer indicating certainty of even one ease next year, while EDH0/EDH1 settled -13.0.
–One large trade of note Friday, 0EH0 9925/9975cs vs 0EZ0 9925/9975cs, a buyer of the deferred call spread 50k for 4.25. This is a roll, out of a previous long of 0EH and into 0EZ0 (the mullet) which expires in December of 2020 on EDZ21 underlying. In spite of a steepening of calendars, there are still those buying protection for the possibility of zero rates.
–A friend highlighted Lagarde’s quote from earlier this month, “We should be happier to have a job than to have our savings protected… I think that it is in this spirit that monetary policy has been decided by my predecessors and I think they made quite a beneficial choice.” It’s really an amazing line on so many levels. Is this one of the reasons that European bonds accelerated their sell-offs? Is it an embrace of the American model of a ‘just in time’ cash flow rather than a stock of wealth? A shift from capital to labor? There’s a post on ZeroHedge today that notes Spain and Italy see the highest usage of cash for payments rather than [more easily tracked] cashless transfers. Savings at risk? Hoard cash….
Another case of repo indigestion coming?
November 10. 2019
https://www.bloomberg.com/news/audio/2019-11-08/why-the-repo-markets-went-crazy-podcast
I am starting with a link from Bloomberg which is a podcast with Zoltan Poszar about repo and liquidity issues. It’s about 50 minutes long, but well worth the listen.
On Friday, I saw this trade, EDZ9 9800/9812 strangle sold at 3.25. The 98.125c settled 2.5 and the 98.00p settled 1.0. As I saw it, I was thinking to myself, I would never do that trade. The upside risk is an unexpected ease in December while the downside is exposed to a funding crisis into year-end. Of course, a couple of weeks ago when I saw someone sell the 98.125 straddle at 16.0 (which now settles 9.0) I also wouldn’t have done it. I even mentioned at the time, that while the trade makes sense from a technical perspective, it would probably be a difficult short to hold. It hasn’t been. And now one could cover all straddle risk with a 9800/9825 strangle for 2.
NO ONE IS GOING TO HAVE THE BALANCE SHEET TO LEND INTO REPO AT YEAR END
That’s what Poszar says about this year end. In the podcast, he mentions a few things the Fed could do to alleviate the conditions that might lead to a funding crunch, but he doesn’t believe it’s likely that the Fed will implement them. We’ve already seen that banks had a meeting with the Fed, and that JPM’s Jamie Dimon openly asked for regulatory relief in terms of making reserves available, but the Fed does not want to go that route. The banks that have reserves to lend are holding them for Liquidity Coverage Ratio purposes. As Poszar says, post-crisis, with Basel III, no bank is going to lend what they MUST hold for regulatory reasons. And banks are not going to use intraday credit from the Fed due to reputation risk. (It sort of makes me wonder, if JPM could almost single-handedly contribute to big rise in repo, as occurred in mid-September, then why is SOFR considered a much better benchmark than libor?)
The summary of Poszar’s talk is that the taper caused a decline in excess reserves, and the additional factor of curve inversion took away foreign buyers at the margin, leaving dealers to absorb more supply, which needs to be funded in the overnight market. He notes that the size of the repo market has exploded, including sponsored repo. ”The country is funding itself overnight”. Of course, the curve shifting back to positive helps alleviate one aspect of this potential problem.
The Fed has worked to re-build reserves with its t-bill buying and balance sheet expansion. As many charts have shown, the Fed’s balance sheet went from $4.449T at the end of 2017, to the taper low of $3.762T at the beginning of September of this year, to $4.039T now with the ‘not-QE’ bill buying. Repo operations have eased funding pressures. Poszar’s point is that there still won’t be enough excess reserves available at year end.
This issue, if correct, is not currently being reflected in futures markets. Though there has been buying of EDZ9 9800 puts for 1.25 (settled 1.0 on Friday), there hasn’t been anything that could remotely be considered ‘reaching’. There are only 311k open interest in 9800 puts vs 495k in EDZ9 9812.5 calls. EDZ9 futures have 1.53 million open. The spread between EDZ9 and FFF0 has been extremely stable since the repo scare in September, holding between 37 and 39 bps. The high in Sept was 41.5. November 3-month dollars (EDX9) which expire in a week, settled at a rate just below libor (98.1025 or 1.8975%). The probability of another ease at the December FOMC has been significantly priced out. With the Nov FF contract at 98.4325, January’20 FF settled at 98.46 or 1.54% and was trading 98.455 late Friday, just 2.25 bps over Nov, signaling only about a 10% chance of an ease next month. The calendar is important. On December 11 the FOMC meeting occurs. On Monday, Dec 16, December Eurodollar contracts expire. According to the TBAC schedule, $78 billion of 3s, 10s and 30s will be auctioned in December, settling on Dec 16, representing $54 billion in new borrowing.
It wasn’t all that long ago that there was a craze for pot-bellied piglets as pets. The trend faded as time passed and those cute little piglets became voracious pigs. Similarly, the large borrowing appetite of the federal government is causing issues, and making it look more likely that the Fed will end up being the buyer of last resort.
In any event, yields are moving higher across the curve. This week US tens jumped 20 bps to 1.928%. Global yields are surging as well. The German bund has gone from -71 bps in August to -26 Friday. The French ten year from -43 bps to +3. Japan from -29 to -6 over the same time frame. Worldwide, there seems to be repudiation of negative yields as a policy tool. In the US, supply may be starting to weigh on bond prices. Bloomberg also ran a piece noting that term premium is increasing.
The charts below show a triple bottom in the ten year yield at 1.36 to 1.46. The top of the eight year range is slightly over 3%. The JGB has a double bottom at -29 bps. It might not be a synchronized global growth story, but it’s looking an awful lot like a globally synchronized rise in bond yields. I think it’s much more likely that the next 50 bps will be higher in yield rather than lower.
Early Monday morning Clarida gives a speech on Monetary Policy, Price Stability and Bond Yields. Powell gives Congressional testimony on the economic outlook on Tuesday and Wednesday. Turkey’s Erdogan is visiting the White House on Wednesday the 13th. CPI and PPI on Wednesday and Thursday, with Retail Sales and Industrial Production Friday.
OTHER MARKET/TRADE THOUGHTS
As predicted last weekend, some of the large long treasury put spreads were exited in the past week as yields rose. The smart money is covering shorts. With the market having accepted the idea of a pause in rate cuts, or maybe even the end of the cycle, Powell will likely stay with the new mantra that ‘the economy is in a good place.’
Eurodollar calendar spreads had a nice rally. Last week I suggested buying EDM21/EDZ21 for 1.5 with an objective of 9 to 10. Settled Friday at 4.5. On the week, the front March/March one-year calendar (EDH20/H21) rallied from -21.5 to -13.0.
Although yields have already had a nice move, I think there is potential for a further washout, especially if Powell talks up the economy and inflation prospects. Longer term I like buying put spreads on everything from greens to bonds, but am hoping a rally allows better entry.
Call me crazy but I think the Trump/Erdogan meeting could bring out other crazies. Security risk?
| 11/1/2019 | 11/8/2019 | chg | |
| UST 2Y | 156.2 | 166.2 | 10.0 |
| UST 5Y | 155.6 | 173.1 | 17.5 |
| UST 10Y | 172.8 | 192.8 | 20.0 |
| UST 30Y | 221.1 | 241.4 | 20.3 |
| GERM 2Y | -65.7 | -61.6 | 4.1 |
| GERM 10Y | -38.2 | -26.3 | 11.9 |
| JPN 30Y | 33.8 | 44.9 | 11.1 |
| EURO$ Z9/Z0 | -39.5 | -27.5 | 12.0 |
| EURO$ Z0/Z1 | -5.0 | 1.5 | 6.5 |
| EUR | 111.67 | 110.19 | -1.48 |
| CRUDE (1st cont) | 56.20 | 57.24 | 1.04 |
| SPX | 3066.91 | 3093.08 | 26.17 |
| VIX | 12.30 | 12.07 | -0.23 |
https://www.bloomberg.com/news/audio/2019-11-08/why-the-repo-markets-went-crazy-podcast
https://www.federalreserve.gov/fomc/minutes/19990824.htm
https://www.federalreserve.gov/fomc/minutes/19990824.htm
Big yield jump; limited from here?
Nov 8, 2019
–Big day Thursday. Yields jumped with tens up 10.5 bps to 1.917%. New high in 2/10 at 24.4, up 3.7 on the day. All near euro$ calendar spreads made new highs. EDH20/EDH21 rose 6 bps to -11.5. EDU20/EDU21 settled POSITIVE 0.5 bp, with all spreads following also positive. Reds/greens up nearly 3 bps to 5.125, while 2/5 treasury jumped just over 4 bps to 6 bps. My working interpretation is that the world is rejecting negative rates (european bonds were already climbing to new yield highs as the US day started; the bund was -70 in the beginning of Sept, and is now -25) and that the Fed’s bill buying works as financial stimulus, steepening the curve and boosting stocks, while perhaps also supporting inflation expectations. But forget my theories… let’s look at a couple of large trades:
–First, on Oct 31, post FOMC when bonds were strongly rallying and near the highs of the day (TYZ 130-13 and USZ 161-21), a buyer of put spreads stepped in to fade the move. He bought 35k TYZ 130/129ps for 19 and 30k USZ 160/158ps for 28. Yesterday he exited at 48-49 in TY and 1’26 to 1’28 in US. This guy seems to know what he’s doing… Settles were actually a touch higher, 0’53 vs 128-125 and 1’38 vs 156-21. Secondly, there was a new seller of 50k EDZ20 9850 straddle at 48.0 (settled 47.25 vs 9835) and a buyer of 50k EDZ0 9887/9937cs around 5.5 to 6.0, settled 5.5. As a combined trade, the thought is that the Fed either stays put or is forced to ease a bit more; the call spread protects the upside. Downside b/e at expiry is around 9808.
–In any case, both of these trades suggest that downside may be limited from here. However, take a look at option straddles, EDH0 atm straddle, now the 9825 line, settled 17.5 vs 9827.5 down 1.5 on the day, and the 9837.5^ settled 22.0 (unch’d). On the opposite end of the curve, the atm Jan US straddle went from 3’22 to 3’42. So, *fear* of the downside has been awakened on the long end. There’s no concern about near term tightening, but eases have also been significantly priced away. However, long end dynamics could be shaped by supply or a return of inflation premium, or simply a massive unwind of flatteners. In terms of reflation, gold isn’t currently sending that message, having been hammered yesterday.
–Consider one other trade from early in the week, a buyer of 0EZ/3EZ 9837 put spread (buying blue, pay 0.5 to 1.25) when EDZ20/EDZ22 was around 0.5 to 1.5. The futures spread settled yesterday at 8.5, while the option spread nearly kept up, settling at 6.5. The synthetic steepener hasn’t worked much, but it paid yesterday!
–A Friday before a holiday for Veteran’s Day (floor closed Monday) probably means that longs will be trying pare back, capping upside today. Probably just chop around.
It’s like some sort of water torture
Nov 7, 2019
–Yields fell yesterday with tens -5.3 bps to 1.812%, buttressed by a solid auction. Early in the session there was a buyer of 100k TYZ 131c for 3 (settled 4 vs 129-105, OI +40k). Prior to the auction, news of a delay in the US/China agreement sparked short cover buying; open interest in TY fell 22k. This morning interest rate futures have given away yesterday’s gains (and more) as US/China have apparently agreed to a phased decrease in tariffs. It’s like… like… water torture.
–In any case, on the euro$ strip EDU20 through EDU22 settled higher by 3.5 to 4.0 bps, while as of this writing greens are -5.0 to -5.5. Thirty year auction today. Will a yield below 2 3/8% generate strong demand? 30y yield ended yesterday at 2.296%.
–NY Fed’s Williams said yesterday that the Fed would address a recession by cutting rates to zero and using communication and asset purchases. Well, we know that the last item “works” as the Fed’s massive bill buying has juiced stocks and calmed rates. As previously noted, forward calendars on both the ED and FF curves indicate that further outright easing in the form of FF cuts have been pared WAY back. FFF20/FFF21 settled -24 yesterday, indicating exactly one ease over the next calendar year. Cuts aren’t necessary, just keep the ‘not-QE’ coming.
–Kayla Tausche of CNBC reported yesterday that Trump will deliver a speech on trade and economic policy at the Econ Club of NY on Tuesday Nov 12. So we have that to look forward to… (followed by CPI Wednesday, PPI Thurs and Retail Sales on Friday).–Interesting chart below shows that Shiller’s CAPE p/e is at a record high as compared to the ten year yield.
https://jessescrossroadscafe.blogspot.com/2019/11/stocks-and-precious-metals-charts-lions.html
Supply inspired steepening
Nov 6, 2019
–Bear steepener Tuesday with 2’s up 4.3 bps to 1.633% and 10s up 8.1 bps to 1.865%. While 2/5 treasury spread made a new high yesterday (chart) at 3.6 bps, 2/10 and 5/30 remain below previous highs. 2/10 closed at 23.2 vs a high of 28.2 in mid-Sept and 5/30 at 67.6 vs a high of 79.6 in July. It makes sense for the belly of the curve to exhibit weakness as the market prices out the idea of further easing. The near FF curve is becoming quite flat with FFX9/FFF0 at just -3.25 having been at -20 a month ago. FFX9 to FFJ0, a period which covers three FOMC meetings, settled -11.25. On the euro$ curve, EDH0/EDH1 settled -16, a new recent high, though below the interday high of -14.5 set on Oct 30. While the treasury curve is perking up, reds/golds in euro$’s are lagging, closing 17, up 2.875 bps. Late July red/gold had gotten as high as 34.5.
–The takeaway is that treasuries are starting to trade a bit like a bear market, though unconfirmed as yet by volume and increases in implied vol. However, nominal midcurve straddle levels in greens and blues have flipped and are now slightly greater than reds. Like a mullet haircut…business in the front, party in the back.
–Today brings the ten year auction. Productivity and Unit Labor Costs expected 2.3 and 2.6. NY Fed’s Williams gives opening remarks at 9:50 to a Global Risk Forum.
Beyond reds
November 5, 2019
–Does supply matter? We’re about to find out this week as treasuries look to re-test the lows made just prior to the FOMC meeting last week, as auctions kick off with today’s $38 billion 3-yr (followed by 10’s and 30’s Wed and Thursday). Aside from supply, US/China talks appear to be progressing. For a long while, it didn’t seem to matter how much of a cash burn some companies generated. Now the market cares, as evidenced by UBER yesterday.
–The curve steepened with 2/10 up 2.8 bps to 19.4, near the recent high. Twos rose 2.8 bps to 1.59% and tens up 5.6 bps to 1.784%. Red/gold ED pack spread was up only 1.375 to just over 14 bps. Option activity was primarily selling, though activity was light.
–Jan20 FF settled 9846.0, just 4 bps higher than Nov, which has, of course, priced last week’s rate cut, settling at 9842 or 1.58%. The market is pricing a pause at the Dec FOMC, another negative factor for fixed income. FFF20/FFF21 settled -26.0 (one cut anticipated over the year). The peak area on the euro$ strip is the last two reds, EDM21 and EDU21 having both settled 98.51. The reds have been the apex of the curve for some time. In a policy environment where any thought of a hike has been shelved, the back contracts (beyond reds) should start to decline a bit more aggressively.
–The Fed’s Senior Loan Officer survey for October was released yesterday. Banks reportedly left standards on C&I loans unch’d, but demand for such loans reportedly weakened. Where demand was more robust, for credit card loans, banks reportedly tightened their standards.
–Today”s news includes JOLTS at 706.3k and ISM Services, expected 53.5 from 52.6.
