Oct 18. CPI today
–Today’s news includes CPI, expected +0.3 with Core +0.2 and yoy Core 2.3. In a WSJ interview from Friday, Dudley said, “I’ve never really been that concerned about the inflation outlook, as long as the economic growth materialized and that put pressure on the excess labor resources. So my focus has always been on the growth side. I didn’t feel that inflation was dramatically below our objective, when you look at core inflation.” He also said, “I think it’s difficult to be precise about exactly how much slack there is in the labor market at any time.” He mentioned yoy comps in energy prices which are going to support the Fed’s forecast of higher inflation. One of the most important voices on the Fed essentially dismissed deflationary hand-wringing.
–The oil market slipped yesterday but has bounced this morning, having spent most of October consolidating at higher levels around 50-51/bbl. Somewhat interesting to note that US equities and hi-yield seem to react positively to stronger energy prices recently, with the rally in the latter appearing especially stretched (spreads have collapsed). As a side note, the Saudi Tadawul All Shares index is back down at the lows of January, when oil had plunged to $25. There was an interceding bounce over the summer, but the trend has been down since August. Higher oil isn’t a panacea…
–Interest rate markets were quiet yesterday, sort of a ‘back and fill’ day with a lower dollar and slightly lower rates. Ten year yield fell 2 bps to 176.4. There were a couple of large notable trades. First, a new buyer of 30k 0EH 9850/9825/9800p flies for 1.5 (settled there ref 9886.5 in EDH8). Second, a steepener, selling 0EF (Jan) 9875p and buying 3EF 9837p for 3.5, also in size of 30k. Difference between strikes is 37.5, Futures spread settled 35.5 (9886.5 and 9851.0). Note that reds/blues as a pack spread edged to a slight new high of 35.75. I would also mention that blue atm straddles are 3 to 4 bps above greens, another small support signal for steepeners.
High-Pressure Uncertainty
“If hell is expanding at a slower rate than the rate at which souls enter hell, then the temperature and pressure in hell will increase until all hell breaks loose.”
–Part of the answer to a chemistry midterm dealing with Boyle’s Law. If you don’t read anything more, at least click this amusing link. http://www.alphadictionary.com/fun/hell.html
I started with the above quote because, in scanning the global news and trying to determine what is important to markets, it seems as if the entire world is “breaking loose”, and that shifts can happen in a hurry with implications far beyond the markets. For example, the overt suggestion by Biden that the US is exploring covert cyber attacks against Russia (huh?). And the response, “The fact is, US unpredictability and aggression keep growing, and such threats against Moscow and our country’s leadership are unprecedented, because the threat is being announced at the level of the US Vice President,” Putin’s spokesman Dmitry Peskov said. Then, there are repeated attacks on US Navy ships from Yemen. And closer to home, Chicago shootings (38 over the weekend, 37 if we omit the guy that was just “grazed”). If the Cubs weren’t winning it would be easy to get the sense that something isn’t quite normal in this world. :- l
The uncertainty extends to the Central Banks, clearly articulated in Yellen’s speech on Friday: ‘Flying Blind, The Fed Considers the Economic Landscape.’ Well, that really wasn’t the title of the speech, but it might as well have been. Yellen referred to five areas where more research is needed. 1) Hysteresis –right there with topic number one it’s obvious that the speech is going to be mumbo-jumbo –what the heck is hysteresis? 2) Heterogeneity 3) Financial Linkages to the real economy (still studying this one, eh?) 4) Inflation Dynamics (the Fed’s not too sure how this works) and 5) International Linkages.
The lines that caught the market’s imagination are these:
If we assume that hysteresis is in fact present to some degree after deep recessions, the natural next question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a “high-pressure economy,” with robust aggregate demand and a tight labor market. One can certainly identify plausible ways in which this might occur. Increased business sales would almost certainly raise the productive capacity of the economy by encouraging additional capital spending, especially if accompanied by reduced uncertainty about future prospects.
PLAUSIBLE? Is that how we’re doing things now? Mere conjecture? It’s plausible that the rise in financial assets from QE will spark sustained, increased consumer demand and therefore business investment in CAPEX and a self-fulfilling circle of increased productivity, beneficial hiring and increased wages and social harmony. But it didn’t really pan out that way, now did it? Plausible: ‘so crazy it just might work.’
Let’s get back to the reality of where prices actually are, as of Friday. Consider the two charts below, the top panel covers one year’s time frame and the second spans five years.
Consider the lower, longer term chart, in the context of recent price action more easily viewed on the one year chart. Are you a buyer, or a seller? If you consider the absolute level, it looks ‘cheap’. On a technical basis it appears to be turning. As of Friday; it has made a 3 month high. If viewed just through the prism of the 100 day moving avg (green line) one would HAVE to buy this chart. If, over the past 5 years you had only traded when the 100 dma was crossed, there would have been a couple of times you would have taken small losses, but you’d have completely captured the big moves. The chart in question is a measure of the curve, the red Eurodollar pack vs the golds (2nd year vs 5th year forward). This chart correlates well with 2/10 treasuries, inflation premiums, etc.
Are there fundamental reasons for a breakout? Yes, in spades. First, Yellen’s comments support the idea of a Fed willing to allow increased inflation and expectations. Working backwards, BoE’s Carney said on Friday he’d be willing to tolerate some inflation overshoot to accommodate economic strength. At Friday’s conference, Boston Fed’s Rosengren said. “Because of financial stability concerns, the balance sheet composition [of the Fed] could be adjusted to steepen the yield curve.” The Bank of Japan suggested an increased inflation target and is only pegging the curve out to ten years. The German bund closed with a positive yield for the past two weeks. Finally, yoy comps in energy are going to start to filter in to inflation data. If oil simply stays here, the yoy increase in WTI will be up 60% from January’16 to January’17. I won’t bother to re-produce the chart here, but 2/10 is quite correlated to the price of oil.
I would note there was a huge steepener block trade on Wednesday: +50242 TYZ 129-25 / -12790 WNZ 177-20. About $4.1 million per bp ($320/ bp on WNZ, $82 in TYZ6). As of Friday, both sides are in the black with TYZ 129-275 and WNZ 176-19.
All this isn’t to suggest that the curve still couldn’t flatten. It’s ‘plausible’ under several circumstances. For example, if the stock market implodes, perhaps the ftq bid occurs along the back end. Continued strength in the USD might have the same effect.
And, there are an awful lot of indications that the economy is stalling, which may lead one to believe that yields must continue to fall and the curve flatten. But I’ll end with two thoughts. First, an increase in inflation expectations and actual inflation needn’t be correlated to economic growth over the short term and second, as observed by many analysts and lived by many traders, the central banks have distorted markets. Their collective narrative may be changing. Once again, consider the red/gold chart above in mid-2013, when Bernanke first suggested a taper: red/gold doubled from 150 to 300 by the end of the year…
Speeches this week: Fed Vice-Chair Fischer on Monday and NY Fed’s Dudley on Thursday.
Oct 13. China slows; steady depreciation of yuan
–Quiet trade in interest rate futures though one-year ED calendars continued to press to higher levels. For example, EDH7/H8 settled 19, up 0.5, highest since late June. Auctions came without drama; 30 year bond today. FOMC minutes were also pretty much as expected – some members wanted to hike in a close call. Interestingly stocks rallied after the minutes, only to give it back and close lower by the end of the session. Same with Euro, which closed at the low of the day (110.10 late, -0.44). DXY was at a new high late of 97.96.
–This morning stocks are lower and the USD stronger. China likely the main catalyst. From Reuters, “China’s September exports fell 10 percent from a year earlier, far worse than expected [-3%], while imports [-1.9%] unexpectedly shrank after picking up in August.” From Bloomberg, “China’s exports dropped the most since February as global demand remained tepid, adding to pressure to the yuan, which is near a six-year low.” CNY this morning 6.7316 as the Chinese currency continues to depreciate.
–Big trade yesterday was a steepening block, +50242 TYZ 129-25 / -12790 WNZ 177-20. About $4.1 million per bp ($323 / bp on WNZ, $82 in TYZ6). This one trade accounted for virtually all of the change in open interest yesterday, with tens adding 49.3k contracts and the ultra bond +8738. Although Fed members are still concerned about repressed inflation, someone thinks premium is coming back to the long end of the curve (making it all the more puzzling that USZ vol remains close to 10%). This trade also dovetails with the idea that Japan is only targeting the curve out to ten years…
–With stocks poised to test lows from early September, there’s an interesting skew article on Bloomberg:
“In the options market, traders are paying about twice as much for two-month contracts protecting against a 5 percent drop in the SPDR S&P 500 ETF, relative to bullish ones, according to data compiled by Bloomberg. The measure reached a record on Sept. 30, the data show.”
This article notes that VIX isn’t exactly setting off alarm bells, having closed at 16.9 yesterday, well below the Sept hike above 20, and the late June surge over 25.
–Finally, from a friend’s commentary yesterday: Gold in GBP terms is +42% ytd! (thanks AOK)
Oct 11. Oil up >> Inflation expectations up. Thanks Vladimir
–Light volume yesterday in interest rate futures. Big mover on the day was crude oil, with the Dec contract settling +1.49 at 51.87, just a couple of dollars off the high of the year, as Putin suggested Russia may freeze or cut output. Red/gold euro$ pack spread gained 1.375 bps to close at 50 bps, just shy of the 100 day moving average, which it has been below since September of last year, and now comes in around 51. The dollar strengthened; currently the euro is testing the low from Friday, thus erasing the unemployment rally.
–Today the Labor Market Conditions index is released, which was -0.7 last and expected at +1.5, though this piece of data seems to have subdued relevance for the market. Wednesday brings auctions of 3’s and 10’s, followed by the 30-yr bond on Thursday. The money market reform deadline is on Friday. These factors are likely to weigh on fixed income prices. Another new high in Nov/Jan Fed Fund spread at 15.5, as expectations solidify for a hike in December. All near one-year eurodollar calendar spreads also notched new highs, with EDZ6/EDZ7 the peak at 21 bps. Imagine that….almost 1/4%.
Oct 10. The Weight of Debt
Consumer credit was released on Friday and showed an almost unimaginable rise of $25.9 billion for August (3rd largest since 2001). Without seasonal adjustment it jumped $46.8B, nearly the largest on record. Non-revolving rose $20 billion seasonally adjusted to a whopping $2.712T. (Non-revolving is student and auto loans). The bulk of the increase was non-revolving, and given the deceleration in autos (and stretched lending terms) we point to student loans, which they must now be taking out for grammar school. Remember, most student loans are funded by the government ($1.024T on the books according to the current release, out of nearly $1.4T). I guess the ‘investment’ in education must really be paying off in terms of a highly educated workforce that sparks rapid increases in growth. (“Want fries with that?”). Except for the fact that estimates of growth are continuously ratcheted down each quarter, with both NY and Atlanta Feds projecting 2.2% in Q3 and NY at just 1.3 in Q4.
Reuters ran a story about China on Oct 4: ‘Road to Stagnation? China Inc gets a break from lenders’
Profits at roughly a quarter of Chinese companies in a Reuters analysis were too low in the first half of this year to cover their debt servicing obligations, as earnings languish and loan burdens increase.
Corporate China sits on $18 trillion in debt, equivalent to about 169 percent of China’s GDP, but few firms reported feeling the heat. Instead, lenders are heeding Beijing’s call to support the real economy and so are rolling over company debt or granting repayment waivers, sometimes for years…
This week it was reported that China’s reserves are edging down and that the off-shore yuan made a new low. China: over-indebted and decelerating and contributing to unfair trade, not so much through currency manipulation, but by allowing dead wood exporters to continue non-economic sales.
The IMF released a report that total global debt to GDP is 225%, to an all-time high of $152T. From the report, “New empirical evidence confirms that financial crises tend to be associated with excessive private debt levels in both advanced and emerging market economies, but high public debt is not without risks.” By “empirical” they mean something that any idiot with a couple of maxed out credit cards already knows. When there is too much debt, too many resources are used to service the debt. When bankruptcies are staved off by lower rates and forbearance, zombies are allowed to roam. Then zombies compete with new companies that have trouble getting sunlight. Resulting in secular stagnation.
There’s nothing written above that is particularly earth-shattering or hasn’t been previously reported. Just some updated names and figures. In the US after the crisis there was a period of deleveraging. All the pundits on tv were happy it was occurring. The problems are twofold, 1) most of the deleveraging came from mortgage foreclosures which essentially shifted to the government’s balance sheet, and 2) deleveraging is painful. It needs to happen on a global basis, but sovereign balance sheets are already bloated. Which leaves option number two: All aboard the PAIN TRAIN, as Izzy Mandelbaum would say.
Back to student loans. Prior to the crisis, they used to say that anyone that could fog a mirror was eligible for a subprime mortgage. Now it seems to be that way with student loans. To be honest, I don’t care if student loans are being used to start up microbreweries and fledgling tech companies in garages. These loans can’t be discharged in bankruptcy. Maybe that’s the smoothest way to create new business and jobs with gov’t financing. I.e. the no-doc small business loan at low interest rates that can’t be discharged, and we’ll call it the Student Loan initiative (which no one can argue with). Set the rate at 500 bps over libor, fixed for five years, no questions asked. Have a limit of $250k over 4 years, as if it’s for education. I’ll bet the success rate for a lot of kids would be pretty good and it would create a more entrepreneurial class in the US than ever before. And yeah, it would probably put some old established businesses out of commission….but that’s how it’s supposed to work. Maybe that’s actually how it’s working now. And I for one, HOPE it is. “Is the money for school?” Don’t ask don’t tell. Might even help income disparity. Both Andreesen and Cuban have said that the amount of capital required these days to start a business is getting smaller. Rather than CBs providing cheap capital to big banks that deny loans to small business but help fund stock repos and dividends for large companies….maybe funnel it right through to ‘student loans’. All I’m saying is maybe that money is better spent on small business experiments than university courses. For example these: ‘Philosophy and Star Trek (Georgetown) or Tattoos in American Popular Culture (Pitzer) or Film Genre: The Zombie Film (U-Cal, Berkeley). Or Surviving the Zombie Apocalypse-Disaster, Catastrophes and Human Behavior (Michigan State)
Apologies for the tangent. Back to this week’s markets. First, oil was up another $1.56 on the week, to over 50.38. As I have mentioned repeatedly, the yoy comps are going to filter into inflation soon. It’s going to give the Fed cover for normalization. The market is pricing December. For political purposes they keep jawboning about November being live. Then after Friday’s data, Hilsenrath declared it’s not. In many ways I thought it was better when there was less Fed transparency and more uncertainty, when there were actually guys called “Fed watchers” that were taken seriously. In any case, on Friday FFX6 (Nov Fed Funds) went from 9957 offer to 58.5 bid. Nov/Jan Fed Fund spread went from 13 to a cycle high of 14.5/15.0. In other words, December is the FOMC hike. But of course there are two more employment reports and a little election beforehand. And by December the Russians and US will come dangerously close to starting a conflagration. Those things will keep the Fed from tightening aggressively. And of course that’s what the market is telegraphing, because no one-year ED spread is above 20 bps and most are stuck around 15.5, though they all edged up this week. So that leaves us to concentrate on the longer end of the market. Last week there had been accumulation of TYX 131 and 131.25 puts. This week there was a large buyer of TYX 130p for 9-12 which were partially exited in the low 20’s. The ten year yield rose 12.5 bps this week and we have supply coming. The German bund broke the water’s surface to close at +2 bps and Japanese tens went to -6.4. The US 30y bond yield rose 13.3. In previous episodes of potential tightening the curve flattened. It’s now steepening ever so slightly. It’s a change worth watching. And short positons continue to be rolled lower, for example, TYZ 127/129ps 22 for 10k.
Fed minutes Wednesday, Retail Sales on Friday and Yellen speaks on Friday, keynote address in Boston, “The Elusive Recovery”. Sounds uplifting.
Quick word about Hurricane Matthew. Katrina was in August of 2005. Landfall August 28/29. First red rallied 50 bps and then fell back immediately. By the end of September the first red had gone through the low existing just prior to the storm. (Which, by the way was 95.50ish at the time). The TY contract rallied about two points, and the reaction lower was faster. This was in the midst of the 2004 to 2006 hiking campaign.
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_________________________________________________________________
| 9/30/2016 | 10/7/2016 | chg | |
| UST 2Y | 76.0 | 84.2 | 8.2 |
| UST 5Y | 115.0 | 126.7 | 11.7 |
| UST 10Y | 160.5 | 173.0 | 12.5 |
| UST 30Y | 233.2 | 246.5 | 13.3 |
| GERM 2Y | -68.3 | -66.6 | 1.7 |
| GERM 10Y | -11.9 | 2.0 | 13.9 |
| EURO$ Z6/Z7 | 14.5 | 20.0 | 5.5 |
| EURO$ Z7/Z8 | 13.0 | 15.0 | 2.0 |
| EUR | 112.40 | 112.03 | -0.37 |
| CRUDE (1st cont) | 48.82 | 50.38 | 1.56 |
| SPX | 2168.27 | 2153.74 | -14.53 |
| VIX | 13.29 | 13.48 | 0.19 |
__________________________________________________________________
http://www.reuters.com/article/us-china-corporate-debt-idUSKCN1240NT
Oct 7. Storms brewing
–When I was a kid working on the floor of the CBOT, the way it was explained to me was, “insurance companies have to raise money to pay claims when there’s some kind of natural disaster, and to do that they sell bonds.” I don’t know if that quaint bit of market lore has any validity these days, but I do see pressure building on the long end of the market, and it’s pretty obvious that Hurricane Matthew is going to do some damage. The storm in the markets this morning concerns the British pound, which experienced a flash crash drop. Again, I am not sure of the ramifications (the longer I’m here the less sure I am about cause/effect given gov’t intervention), but volatility across markets seems pretty low given these one-off events that aren’t all that infrequent. USD appears to be breaking out to the upside (which I think will translate into weakness in EEM). This morning from the WSJ: “The yuan hit its weakest level against the U.S. dollar since January in offshore trading in Hong Kong after data showed a sharper-than-expected decline in Chinese foreign-exchange reserves. ” The yuan touched 6.7182 per dollar early Friday, its lowest since Jan. 7. Recall the August 2015 devaluation of yuan the reverberated through markets; this latest move is controlled but still will have an impact.
–Today is, of course, the employment data. NFP expected 172k. Avg Hourly earnings +0.3 m-o-m and 2.6% y-o-y. I believe it’s a pretty low bar to hurdle to encourage new waves of selling in treasuries, and I don’t think the strong oil/strong dollar situation is going to do any favors for stocks. The most important aspect of yesterday’s trade was that reports of an ECB taper plan were called incorrect by Vitor Constancio. “Indeed, we [the ECB] have not discussed anything about the timetable of QE. So all the rumors are just that, rumors without any foundation.” This comment caused a rally In both stocks and fixed income, but the pop in TYZ was short-lived and the contract came back down to make a new low.
–What I think I HAVE learned is this, I wouldn’t be selling any cheap property insurance in the southeast, knowing a storm is bearing down. Today’s GBP crash is a reminder that damage can occur in markets as well; might not want to BUY cheap premium, but you surely don’t want to sell it.
Oct 6. Pushing too hard
–“Rarely do we investors get a market that we know is over-valued and that approaches such clearly defined limits as the bond market now”. Ray Dalio in remarks to the Central Banking Seminar. In his comments (posted on LinkedIn) Dalio also says. “If appropriate risk premiums don’t exist, the transmission mechanism of capital won’t work as well and the economy will grind to a halt. For these reasons major central banks are facing a ‘pushing on a string’ situation. The last time this happened was in the late 1930s.” Dalio uses the phrase “pushing on a string” repeatedly in his comments, but (ironically in my opinion) concludes CBs will be driven to buy riskier assets. Which further blurs appropriate risk premiums, right? In any case, the fault lines have been identified; central banks on one side and various famed investors on the other, pushing their respective tectonic plates by millimeters until the shift occurs. Dalio, Gross, Soros, Druckenmiller, Gundlach, etc…all have issued warnings while the central banks float trial balloons to extricate themselves from impotent policies. (When is Google like a central bank? When it pulls its bid for Twitter and sends it crashing).
–Yields rose yesterday as non-mfg ISM was much stronger than expected (and printed the high of this calendar year) at 57.1. The problem is that this data series has been so volatile that it has likely lost its usefulness. Late in the day Crude oil was up another $1 to 50.32, essentially matching the high print in August of 50.59. On a continuous chart oil appears to be making a head and shoulders bottom which would target over 70. I’ve read many analysts who think oil can’t get much above 50 as marginal producers will enter the market in force and cap prices. It’s a battle between fundamentals and technicals.
–New highs made in some of the near spreads yesterday, for example EDZ6/EDZ7 posted a new high of 19.0. Kind of a big deal, because we haven’t had any year spreads above 20 except for late July and just prior to the Sept expiration when EDU6/U7 popped just above 20. This firmness is also occurring in the context of an expected hike in December. Maybe it’s just a ‘micro-aggression’ in the market and can be ignored, maybe not.
–A couple of big trades yesterday: Seller of EDX6 9900p at 1.5, open int +35k, and a buyer of TYF 115p for cab-7 in 25k. If one considers the former trade in conjunction with FFX6 (which settled at 9957.0 on new selling and added 20k to open interest), it makes some sense. On a hike in Nov, FFX goes to 9937 (make 20) and EDZ probably goes to 9888, lose 10.5. On a no-go, lose 4 on funds and make 1.5. Looks ok, except that the odds of a hike in November are exactly zero.
Inflation expectations and oil
Oct 5. Pressure builds on long end
–From yesterday, *GROSS IN TWEET: ECB TAPER REPORT BEARISH FOR GLOBAL BONDS. Know what else is bearish for bonds? Higher inflation premiums, and that’s what appears to be starting. Gundlach says he owns tips for the first time in a long while. December Crude oil has continued to rally and this morning is above $50. Both 5y5y infl frd swaps and the tip/treasury yield spread have been firming. Italy issued 50 yr bonds (at a yield of 2.85%). As Trump might have said, “It’s brilliant! We issue long dated bonds at low yields just as central bank support is poised to pull back, saddling widows and orphans with instant capital losses (which they can use to cut forward tax liability).” In Japan, yield targeting apparently isn’t going to go past ten years. In the UK the 5y5y inflation swap is also surging, as new lows in GBP raise concerns about the price of imported goods. All of which suggests that curves could steepen, and indeed yesterday both 2/10 and 5/30 rose, to 86.3 (+3.7 bps) and 118 (+2.6). There was a large buyer of TYX 130 puts early in the day at 9-12, with open interest up 25k on volume of 78k, price settled 18. The ten year yield on its own rose 6.1 bps to 168.1. And to top it off, Loretta Mester suggested two days ago that a hike could occur in November, and ultra dovish Evans didn’t rule out November and said he would be ‘fine’ with a hike in Dec. By the way, open interest in Nov Fed Funds went up 10k on new selling, with a settle of 9957.5. With no hike, the risk is up to 9960.5. As mentioned yesterday, it’s probably much better to just sell EDX6 at 9910.5 which also prices in odds for a Dec hike.
–News today includes ADP expected 165k. Non-mfg ISM expected 53.0 from 51.4. Factory Orders -0.2 from +1.9. Trade data as well, expected -$39.0 B
Oct 4. Sweet Loretta
–Extremely quiet Monday marked by slight weakness in both stocks and bonds. While ISM was stronger than expected at 51.5, a host of other indicators point to a slowing economy, including a stall in auto sales, slowing restaurant sales (“Broad-based declines in the current situation indicators caused the RPI to fall below 100 for the first time in eight months,” ) and a drop in the Atlanta Fed’s GDP Now to just 2.2% for Q3, the lowest yet in the cycle. Bloomberg notes that Manhattan apartment sales have dropped 20%.
http://www.restaurant.org/News-Research/News/RPI-drops-into-contraction-territory
http://www.bloomberg.com/news/articles/2016-10-04/manhattan-apartment-sales-plunge-20-as-homebuyers-get-pickier
–Notably crude was up 42 cents late to 4924, building on last week’s rally, though this morning a strong dollar is erasing those gains. Once again, each day that passes going forward, crude oil will start to show higher and higher yoy percentage changes. Unsurprisingly, market based measures of inflation expectations are already rising, including the 5y5y inflation frd swap and the spread between the ten year inflation indexed note and 10y treasury, which I marked at a new high yesterday of 164 bps.
–In all, we appear to be in stagflationary environment, which, of course, caused Loretta Mester to say that a November hike is a possibility. It’s not. An earlier speech by Dudley was softer. He said that regulation didn’t appear to have a noticeable effect on liquidity, though he obliquely mentioned the rise in libor associated with MM reform. Right…no effect on liquidity…until you NEED it.
–Nov/Jan FF spread settled at a new high of 13.5, high for the cycle and squarely targeting Dec for the rate hike.
–Though some have referred to this Friday’s employment report as ‘critical’, the market doesn’t seem to care very much as the Friday expiration 131 straddle was only 39/64’s late. Interestingly, there was an 8 bp jump in Italian 30 yr bond yields as Italy announced plans to sell a 50 yr issue (which will likely be funneled into the banking system for a new rescue). Taken together with the BoJ’s decision to target tens and let the back end of the curve seek its level, and increasing market based inflation signals (occurring in the UK as well as the pound makes new lows and the FTSE soars), there’s an increasing argument to be made that curves will steepen.
