July 12, 2017. Yellen testifies to Congress today

Link from ZeroHedge contains  the full note of Harley Bassman which suggests many current strategies are short vol and convexity.  This article notes that corporate buybacks have been a large pillar of support for stocks, and that increases in the cost of debt engineered through either the Fed or tax policy could push things over the edge. [esp given record corporate debt]

http://www.zerohedge.com/news/2017-07-11/derivatives-trading-legend-little-4-decline-one-day-could-start-critical-crash

–Today Yellen’s testimony before Congress is at 10:00 EST; the written summary was released last week.  Ten year notes are auctioned at 1:00 and Beige Book at 2:00.

–Large trade yesterday was buyer of 63k TYQ 124/126 strangle for 10.  Settled there in a 9/10 market ref 125-055 (7c, 3p).  Open interest in call was +61k and in put 55k.  Somewhat of an interesting trade in light of Bassman’s comments.

–Yields edged lower again yesterday with tens down 1 bp to 236.1.  Brainard’s speech said that normalization of the funds rate is well under way, opening the path to balance sheet run off, noting that “the global economy is experiencing synchronous growth.”  Later in the speech is this more dovish snippet: “In my view, the neutral level of the federal funds rate is likely to remain close to zero in real terms over the medium term. If that is the case, we would not have much more additional work to do on moving to a neutral stance. I will want to monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target.”

July 9, 2017. Just go with it…

In the middle of 1994 I saw an interview with Tom Baldwin on whatever the financial channel was at the time.  Baldwin was perhaps the most flamboyant local in what was then the biggest, and most heavily traded futures contract, the 30 year bond.  This wasn’t like Margie Teller in back month eurodollars, another massive trader with spreads across the entire curve, well known to every major bank swap dealer.  In the bond contract it was pure direction, up or down.  Anyway, while many locals went home flat or with a small position, Baldwin was, by that time, a position trader, carrying large inventory.  On the old CBOT floor, the pit was raised at the sides and there were concentric (in the shape of an octogon) steps down into the middle.  The surrounding desks could only see a small arc of the side of the pit where they were located.  My job as a phone clerk was to quote the market and size, and relay players…who is buying and selling etc.  Everything was flashd with hand signals, and when busy, it was LOUD.  Every firm had a hand signal, and the big locals did too.  Plaza (Salomon’s clearing arm) was like a square drawn in the air, Refco was for obvious reasons, like someone toking on a reefer, Merrill was an index finger jammed into the palm of the opposite hand (Merrill, Lynch, PIERCE, Fenner & Smith), or it might have meant getting gored by a horn.  Baldwin was symbolized by running a hand over your head (bald).  I remember many times seeing the bond drop 10 or 12/32’s and yelling to our pit clerk ‘who’s selling?’ and an inevitable, wild gesticulation of hands sweeping back over foreheads.  There was a LOT of made-up players and quoting, but that’s all a story for another time.  Anyway, back to the TV interview.  Baldwin is slouched in a chair in his trading jacket and frayed tie with the knot down to around the second shirt button, and he was telling the interviewer, “At the beginning of the move I fought it for the first few points [lower] but the selling didn’t stop.  So I started selling too.”  It wasn’t technical mumbo jumbo about spreads, and central banks, and mortgage convexity.  It was this:  I personally saw the selling pressure and went with it.

The thirty year bond contract closed Friday at 151-25.  Eight sessions ago it settled 156-29 and subsequently declined 7 out of the next eight.  There appears to be selling pressure. It’s no longer the granddaddy contract, but it’s still sending a signal.  Now in 1994, the change was that the Fed began to hike rates after a bit over a year at the then rock-bottom FF rate of 3%.  The central bank was shifting (fairly aggressively) from its accommodative stance.  Currently the markets are massively larger globally, and several central banks are signalling reduced accommodation.  In 1994, the bond contract went from 122-00 in (Oct 1993) to 96-00 (Sept 1994).  This was at the time of the 8% notional contract.  The yield went from 5.8% to 8.16%.

The point of this story, besides a pleasant reminiscence, is that when positions are simply offisdes, and the selling unwind begins, you really don’t need to know every little nuance.  The central banks have jammed everyone into long duration and higher risk instruments.  I think Peter Tchir of Brean Capital has made some pretty simple and succinct descriptions of the current market environment.  (from MNI)

“There have been a lot of convoluted answers to the question of ‘how can yields be so low and stocks be so high?'” he said. “I continue to think the simplest” explanation “is that investors of all sizes, shapes and forms have been buying long dated sovereigns as a hedge to their risky equity holdings.”
“Whether you want to call that Homebrew Risk Parity ‘or Risk Parity Lite’ or just a good old-fashioned barbell of owning FAANNG and the long bond, the result has been the same: lower Yields, lower volumes, lower volatility and “low to negative correlations between Treasuries and equities,” Tchir said.
“if this trade, which I think is extremely crowded, is beginning to unwind, then the opposite should play out. Higher yields will drag down stocks. Investors will have to return to ‘traditional’ hedging methods, which should increase the price of volatility, or VIX. This is all occurring in mkts with limited depth to liquidity. Oh, at any given price, the algos are swooping around scraping up pennies, but there seems to be little real depth to stop ‘air pocket’ type of moves, albeit in both directions. Credit spreads will go along for the ride.”

 

The chart above shows global ten year yields (I use the 30 yr forJapan since the BoJ is pegging the ten year rate).  All have been moving higher since mid-June.  Canada and Germany are at new highs.  Sometimes it’s just about bad positioning.

I don’t know if this will be a global taper tantrum.  But I do know that after Bernanke’s hints of a change in policy in May of 2013, the ten year note traded over 3% by the end of the year.  It’s now 2.39%.  The red/gold pack spread in eurodollars also traded above 3% from a starting point of around 150 bps; it’s now just 67.  In fact, in May of 2013, the 30 yr bond yield was around 2.90, which is right where it is now.  By December it had traded to nearly 4%.  Are we going to see the same types of levels?  I don’t know.  I don’t know whether the *right* price for the 30 year is 2.5% or 3.5%.  What I do know is that global central banks have shifted to a more hawkish stance.  Selling has started.

One other sort of interesting note.  In 1994 the 30y yield went from 5.89% to 8.16%.  In the May 2013 taper tantrum, the yield started around 290 and ended at 397.  If one doubles those latter yield levels, then the magnitude of the move in percentage terms is about the same as the 1994 experience, i.e. 580 to 794.

There’s not a lot of news out in the early part of the week.  PPI and CPI are Thursday and Friday, with Retail Sales and Industrial Production also on Friday.  Fed yammering throughout the week, with Williams Monday, Brainard and Kashkari Tuesday, and Yellen before Congress Wednesday and Thursday.  Treasury auctions 3’s, 10’s and 30’s starting Tuesday.

 

_________________________________________________________________

	6/30/2017	7/7/2017	chg
UST 2Y	138.2	140.3	2.1
UST 5Y	188.2	195.5	7.3
UST 10Y	230.0	239.1	9.1
UST 30Y	283.9	293.4	9.5
GERM 2Y	-57.2	-59.9	-2.7
GERM 10Y	46.6	57.3	10.7
JPN 30Y	84.0	90.0	6.0
EURO$ Z7/Z8	32.5	39.0	6.5
EURO$ Z8/Z9	24.5	27.5	3.0
EUR	114.27	114.03	-0.24
CRUDE (1st cont)	46.04	44.23	-1.81
SPX	2423.41	2425.18	1.77
VIX	11.18	11.19	0.01

___________________________________________________________________

July 7, 2017. Yields threaten to push higher in front of today’s NFP

–Nasdaq erased Wednesday’s bounce, and ESU had the lowest settle since 31-May.  Oil faded from early strength but still closed positive, however CLQ is down over $1 as of this writing at 44.40.  Weakness in equities did little to stem selling pressure on fixed income, with tens closing 3.6 bps at 236.8.   Calendar spreads continued their widening trend, for example, red/gold pack spread gained nearly 3 bps to close at 66, the highest since late May. Nearly all one-year calendars made new monthly highs.  Red/green pack spread finally back above 25 bps again at 25.875, +1 on the day. The 2/10 treasury spread gained 4.4 bps to 96.6.  It has now exploded 17 bps since posting a new low of 79 on the FOMC day.  Of course, over the same time frame the German BOBL (5yr) has leapt 38 bps to yesterday’s -7.2.  There appears to be a global shift in sentiment, which Gundlach mentioned yesterday, apparently saying tens could again reach 3%.  However, the BoJ stopped the yield rise in the ten year JGB, offering to buy an unlimited amount at 11 bps.
–One other small note: the 30-yr bond yield rose 5.1 bps on the day to 290.4.  Thirty year options are becoming quite a bit more active.  While futures volume was 310k, option volume was over 216k.  August calls 53859, Sept calls 23561, Aug puts 111,746, and Sept puts 27171.  Worth keeping an eye on this, as it may portend a combination of term premium and inflation premium increase. (Almost twice as many puts as calls trade).

–Employment report today with NFP expected 178k.  ADP was weaker than expected yesterday at just 158k, but given last month’s surprise NFP of just 138k it’s reasonable to look for a solid bounce.  Besides this report, the Fed’s semi-annual report is released at 11:00 EST, and of course the G20 starts, as well as a meeting between Trump and Putin.

July 5. FOMC Minutes today.

–Yields continued to rise with the ten year up 4.5 bps to 234.5 (as of 1pm EST floor close).  The curve also steepened; 2/10 up 1.3 bps to 93.1.  Target on 2/10 should now be 100.  A more obvious upside breakout of the curve was in red/gold euro$ pack spread (2^nd to 5^th year), which was up only 0.75 to 65.0, but is clearly through the downward sloping trendline from December.  The initial objective should be 70-72.   Nasdaq closed at its lowest level since mid-May, as large cap tech stocks had been trading with all the characteristics of bonds.  Both now appear to be reversing.  GOOGL a leader to the downside as it’s now down 8.6% from the high less than a month ago.  Netflix is actually down 12.25% from the high in early June, though in terms of market cap it’s only 1/10^th the size of Alphabet.

–One-year euro$ calendar spreads also gained, with EDZ7/EDZ8 closing 35.5, up 3.0.  The peak one year spread is EDU17/EDU18 which closed at 39.0.

–Treasury vol appears to be confirming the move to higher rates, or, at the very least, indicating fear of a continued sell off.  One week ago Monday the TYQ7 atm straddle, which was the 126.75 line, settled at 0’62.  Yesterday, the atm 125.0 straddle settled 0’63.

–Crude oil added to its impressive bounce since it closed 42.53 on 21-June.   Yesterday was the eighth session in a row with a positive close, trading 46.75 late Monday.  More startling than that has been the rally in grains.  Sept Wheat was 436 ¼ on June 1, and yesterday it closed 555, a gain of 25% in a little over a month.

 

July 3. Sentiment change. Yellen undermines the Fed

During the initial part of Janet Yellen’s interview with Lord Nicholas Stern last week, she said “We don’t just use models, we also talk to people.”  [Crowd twitters appreciatively].  She proudly pointed out that the Fed talks with a wide range of business contacts, noting that from these communications, the Fed sometimes “learns things that are very important they might otherwise miss.”  I guess this story was supposed to justify the Fed’s current decision making structure over a strict rules based policy.  She then went on to eloquently relate what her contacts were telling her in 2007, in effect completely demolishing her own argument, and by extension, the Fed’s own credibility.  She said in the year prior to the crisis, the Fed was focused on housing, but her business contacts “KEPT SAYING that money was available for absolutely anything.  Banks are throwing money at anything without seriously looking at the prospects…” [She repeated this for emphasis] “And people said they had never seen anything like it in their lifetimes.”  In particular, she said one of her contacts, a director at a private equity firm, crystallized the situation for her.  This firm was contemplating a bid to take a large company private in an LBO, and there was competition to do the deal.  And he first thought it would be impossible; they would need a “huge amount of leverage”, but his partners urged him to write down exactly what type of debt would be needed, and to go talk to the bankers.  “If the economy hit so much as a pothole, they might not be able to make the debt payments.”  In order to sidestep this issue, the banks used a “Payment in Kind” feature.  The investor said that “banks were falling all over themselves to give these terms” and were using the PIK Toggle*, which became a common feature of debt contracts.  Banks were packaging these loans and selling them as higher yielding safe investments.  She finishes with this:  ( ! ! ! )  “This was like bells going off.  Now unfortunately, this was too close to the financial crisis, and it really wasn’t information that we could use to address what lay ahead.”

WHAT?  I had to listen several times.  But here’s the link.  Minutes 8 to 12.

http://www.britac.ac.uk/audio/janet-yellen-conversation-nicholas-stern-presidents-lecture-2017

I’m reminded of Milton Friedman:  “…my conclusion [is] that monetary actions affect economic conditions only after a lag that is both long and variable.”

First you have to identify the problem (usually there’s a lag), then you have to formulate and implement policy (lag) and then it takes time to filter through the economy.  Even with sophisticated business contacts the Fed was late to stage one.   Perhaps model based rules would work just as well.

By the way, it’s different now.  Blue Apron went public last week with this encouraging disclaimer:  “We have a history of losses, and we may be unable to achieve or sustain profitability.”  BUY!

Later in the same Yellen interview, there’s the clip that EVERY news outlet jumped on.  “Would I say — will there never, ever be another financial crisis? Probably that would be going too far. But I do think we’re much safer, and I hope that it won’t be in our lifetimes — and I don’t believe it will be.”

Compare and contrast that with Bernard Arnault, the CEO of LVMH who had previously (6/15) said:

“I don’t think we will be able to globally avoid a crisis when I see the interest rates so low, when I see the amounts of money flowing into the world, when I see the stock prices which are much too high, I think a bubble is building and this bubble, one day, will explode. 

There has not been a big crisis for almost ten years now and since I’ve had a business I have seen crises more than every ten years, so be careful.”

This guy sells the finest champagne as one of his product lines.  I’m betting he knows bubbles and popping a lot better than Yellen.

Now to the markets.  One of the questions illuminated by Yellen’s interview relates to identifying changing conditions.  And THIS was a week for THAT.  I mentioned last week that the German Schatz had closed at a new ytd high, and suggested that this would underpin strength in the euro.  However, I was pretty constructive on US fixed income, noting that euro$ calendars and the US curve in general were near new lows.  Well this week, while maybe not exactly like ‘bells going off’ certainly signalled huge possible changes in conditions.  Draghi said ‘deflationary forces have been replaced by reflationary ones.’  Carney and Poloz are leaning toward hikes.  The German bund yield surged 21 bps on the week to 46.6.  Weidmann on Saturday said, “The ECB is working on moving away from its ultra-easy monetary policy.”

In the US changes weren’t of excessive magnitude, but several measures of the curve made new monthly highs.  For example, 2/10 treasury spread closed near 92, a bounce of 12 bps off the low set on FOMC day.  Same thing with the red/gold pack spread in eurodollars; it closed at a new recent high of 64.25, up 10 from the low set on 20-June.  The US ten year yield closed 2.30%, through a downward sloping trendline from March to May.  The post-Brexit low one year ago was 1.36; the high yield in March was 2.627.  The 0.382 retracement was 2.142 which essentially held in June, so the technical picture suggests higher yields.  Flattening in the wake of the FOMC may have been the final capitulation.

More dramatic were moves in the UK and Germany.  Two-year calendar spreads in both the UK and in Euribor made new highs.  For example, I looked at the 2^nd to 10^th quarterly spreads on a constant maturity basis in Short Sterling, Euribor, Euro$ and BA’s.  [Now Dec’18 to Dec’20].  In order, the spread values are 46, 45, 57 and 49.  All clustered fairly tight in terms of absolute value, but Sterling and ER are at new highs, having rallied 25 and 22 bps respectively off lows a couple of weeks ago.  In the US, the spread at 57 is only about half of its post-election high made in December of last year.  The point is that interest rate differentials are working against the USD , which is at its lowest level since last October, and is down over 7.5% [DXY] since the start of the year.   In turn, the weaker dollar, at the margin, supports the dollar prices of commodities.   August Crude oil jumped over $3/bbl this week to close just over $46.  Oil is still in a longer term downtrend, but the stark divergence between stocks and the Bloomberg Commodity Index (shown last week) finally indicates a spark of reversal.

The end of this holiday week is chock full of important events.  Unemployment report is Friday.  The Fed will release its Semi-Annual Monetary Policy Report later on Friday (11AM EST).  G20 on 7^th and 8^th.   FOMC Minutes are released on Wednesday.

**Also, the exchange, in its infinite wisdom, has a regular 5:00pm EST close for interest rate contracts Monday.  If there was ever a day that moves might be exacerbated in thin conditions, this is it.

 

_________________________________________________________________

	6/23/2017	6/30/2017	chg
UST 2Y	133.6	138.2	4.6
UST 5Y	175.5	188.2	12.7
UST 10Y	214.2	230.0	15.8
UST 30Y	271.3	283.9	12.6
GERM 2Y	-62.4	-57.2	5.2
GERM 10Y	25.5	46.6	21.1
JPN 30Y	80.0	84.0	4.0
EURO$ Z7/Z8	26.0	32.5	6.5
EURO$ Z8/Z9	20.5	24.5	4.0
** EDZ7/Z8 now peak 1-yr
EUR	111.93	114.27	2.34
CRUDE (1st cont)	43.01	46.04	3.03
SPX	2438.30	2423.41	-14.89
VIX	10.02	11.18	1.16

 

http://www.investopedia.com/terms/t/toggle-note.asp

https://ftalphaville.ft.com/2016/09/08/2174362/this-is-nuts-pik-toggle-edition/?mhq5j=e2

June 29. (Un)easy money

–Yields pushed a bit higher with tens up 2 bps to 221.9; curve tilted steeper with 2/10 up 3.7 bps to 87.   The dollar index closed at a new recent low.  Hawkish central bank comments prompted Reuters to ask in a headline. ‘End of Easy Money?’ http://www.reuters.com/article/us-global-markets-idUSKBN19K031

–At the end of a light volume day, the Fed announced that banks hurdled the stress tests.  CNBC commentators were almost giddy about banks returning money to shareholders through increased dividends and buybacks.  For example, Citi increased its dividend by 100% coupled with a buyback of $15.6b.  My question is this: if the Fed is now primarily concerned about financial stability conditions and continues to hike Fed Funds, won’t it become much harder for banks to make money with a flat (or even inverted) curve?  One of the guests repeatedly referred to the Fed’s FOR data (Household Financial Obligations Ratio, which is the % of disposable income that HH’s use to service debt).  He noted that it has been near the lows for several years, apparently to suggest that HH balance sheets are in great shape and a wave of consumer spending is going to wash over the economy.  Dude, you’re missing something.  It’s not HH balance sheets that we’re concerned about this time, it’s corporate.  Also, given that the FOR is on the low side, why hasn’t consumer spending already taken off?  Since 1990, the high in FOR is 18.13% in Q4 2007. Since 2013 it has been between 15.56 and 15.24 and is now 15.47 (2017, Q1).  Is it that big of a deal?

–News today includes Q1 GDP 1.2 expected and last.  Jobless Claims 240k.

–Ten year note is near an important level 224 to 225.  A couple of closes above this level should portend a leg to higher yields in general.  Beware the unwind of both stock and bond rallies simultaneously.

June 28. Mush

–Here’s a nice summary of yesterday from Bloomberg: “While Yellen qualified her assessment that asset valuations look high by some measures, the note of caution came just as markets were buffeted by a series of events, including an IMF cut to its U.S. growth forecast, Google suffering the biggest ever EU antitrust fine, a fresh blow to the Republican agenda in Washington [health care vote stalled] and a global cyberattack.”  I would add that Draghi’s hawkish comments in the morning initially caught the market out.

–Yesterday I noted that some commentators thought the Fed’s emphasis was shifting from employment and inflation to financial conditions.  Fischer solidified that idea, saying there’s been “a noteable uptick in risk appetites” and that high asset prices could lead to stability risks, adding that the corporate sector was significantly leveraged.  The net effect was selling pressure in both fixed income and stocks.  This is probably not the time for knee-jerk buys of bonds as stocks weaken further; the dynamic appears to be changing, both assets could decline simultaneously.   Euro broke out to the upside.

–Eurodollar spreads bounced as the curve steepened.  EDZ7/EDZ8 rose 3 bps to 29.  Implied volatility also firmed marginally in a nod to the sell off, with tens rising

6.3 bps to 219.8.  TYU 126.5 straddle settled at 1’40 (the offered side) right at 4.0 vol.  VIX also firmed from its sub-10 close yesterday, ending at 11.02.

–Yellen yesterday said ‘there will be no new financial crises in our lifetime’ and Trump has tied his success to the value of equities.  “We been mushed.”  Yellen will be lucky to get out of chairmanship without a crisis.

June 27. Change in focus?

–Several commentators are claiming the Fed has shifted its focus away from inflation and towards financial stability as stocks have continued their ascent and financial conditions have generally eased over the ‘tightening cycle’.  Some have boiled down that idea to a simple focus on stocks, thinking that the Fed is now tightening specifically to stem their rise, though that surely is too narrow an interpretation.  Yellen speaks today at 1:00 EST, preceded by Harker; perhaps there will be more evidence of such a shift, but this Fed is too timid for any bold changes.  If that were the goal, a more aggressive balance sheet program would do the trick, but the boiling frog template is more suitable to the Fed.

–In any case, 5/30 again notched a new low just under 94 bps.  Implied vol in treasuries languishes to new lows, with the atm August TY straddle below 1 point (settled 0’62) with 3 and a half weeks to go.  I marked Sept US vol out at just 7.3, also a new low, and VIX closed below 10.  Cryptocurrencies took a beating with the big tech names closing lower.  AMZN and Alphabet had outside days and lower closes.  Perhaps the Fed can just intervene in bitcoin to reach their goals…

–5 year auction occurs at the same time as Yellen; could be a small concession.  Yesterday’s data again weaker than expected.  If the Fed does manage to push stocks lower there will almost certainly be declines in confidence readings which could spill over into consumption.

June 25. Trending

Brief notes this week with the main themes being 1) continued curve flattening,  2) financial deregulation as a stimulus program, and 3) unrelenting pressure on energy markets.

The curve signals stagnation. 2/10 treasury spread made its low of 79 on the FOMC meeting, but has never really bounced since and closed 80.6, versus a high last December of 135.5.  5/30 made its low this week at 95.25 bps and closed 95.8. Old support of 102 to 109 should now be major resistance.  In eurodollars, all near one year calendar spreads made new lows, with EDZ17/EDZ18 ending the week at 26, down 2.5 from last Friday. Jan’18 to Jan’19 Fed Fund calendar closed at just 21.5, indicating less than one hike over the year.

Outside of the US, the German curve also flattened to a new recent low with 2/10 at 88 bps.  Schatz closed at a new ytd high yield of -62.4, and appears to have made a longer term bottom.  As can be seen on the chart below, this turn also underpins support for the EUR. [Chart: SCHATZ Amber and EUR White]

Some Fed officials have back-pedaled on the need for further hikes, but I would note relative weakness in banking stocks since the Fed’s recent move, in spite of sailing through the Dodd Frank stress tests, and in spite of the prospect of regulatory relief.  For example, the Bloomberg article ‘Treasury’s Regulation Unwind Already Having an Effect on Markets’, highlights easing of both the Supplementary Leverage Ratio and the Leverage Coverage Ratio.  Mnuchin’s quoted as saying “we want to unlock billions, if not trillions, of new liquidity.”

https://www.bloomberg.com/news/articles/2017-06-23/traders-wager-on-liquidity-wave-from-easing-of-bank-regulations

I’m not pretending that I know the right mix of regulation in terms of economic nirvana, but I do think that the Fed perceives ‘macroprudential policy’ as an important tool against banking excesses which contributed to the last meltdown.  If the Treasury rolls back regs in the face of the Fed, does the Central Bank respond with the blunter tool of FF rate increases, which further flattens the curve, which puts more pressure on banks, which creates more incentive for banks to find profits in…financial engineering?

The real question is this: will such regulatory relief find its way into the real economy in a sustained way?  Or will it be just another straw in the basket of the financial engineering camel?  The chart below is probably just a dated relic of an economy that previously attached some importance to commodities, but it’s still stark in its divergence since 2011, and could be loosely interpreted as a ‘financial engineering vs real economy’ picture.  It’s the Bloomberg Commodity Index (amber) and the SPX (white).

In terms of recent ‘transitory’ declines in inflation, I’ve heard a couple of officials refer to large declines in cell phone bills.  Repeat: cell phone bills.  Can that possibly be bad?  Is that what’s making it hard to raise wages and increase living standards?  We still seem to be in a financial engineering world, with increasing debts that still need servicing.

The decline in energy markets is another large factor which has begun to spill over ever so slightly into high yield spreads.  (The BCOM index in the chart above is heavily influenced by the price of oil).  Oh, and it also has a negative effect on inflation readings.  I was completely in the ‘reflationista’ camp early this year as oil had bottomed in early 2016 and I thought yoy comps this year with oil over 50 would give inflation a boost.  It didn’t happen.  In terms of the longer end of the curve, it seems like yields are too low.  On the other hand, there were fears some time ago that Chinese selling would drive the US long end yields up.  Didn’t happen.  The prospect of balance sheet reduction was supposed to have a negative effect on the long end.  Didn’t happen.  The longer term bias continues to be lower yields in bonds, despite nominally low levels already.

The quarter and first half ends this week.  Monday Durables,  Thursday Q1 GDP (1.2).  Friday Personal Income and Spending.

 

_________________________________________________________________

	6/16/2017	6/23/2017	chg
UST 2Y	131.5	133.6	2.1
UST 5Y	174.3	175.5	1.2
UST 10Y	215.5	214.2	-1.3
UST 30Y	278.1	271.3	-6.8
GERM 2Y	-65.8	-62.4	3.4
GERM 10Y	27.6	25.5	-2.1
JPN 30Y	81.4	80.0	-1.4
EURO$ Z7/Z8	28.5	26.0	-2.5
EURO$ Z8/Z9	22.0	20.5	-1.5
** EDZ7/Z8 now peak 1-yr
EUR	111.98	111.93	-0.05
CRUDE (1st cont)	44.97	43.01	-1.96
SPX	2433.15	2438.30	5.15
VIX	10.38	10.02	-0.36

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June 23. Euro$ calendar spreads: One hike a year — or less

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