May 15. Every day I have the blues. BB King
–Quiet session Thursday with another data miss as PPI was expected +0.2 and actually came in at -0.4, with yoy Core PPI at just 0.8%. However, Jobless Claims were only 264k, near the lowest levels since the early 1970’s according to my BBG. I can’t even believe it tracks back that far…
–Yields declined on the day as treasury concluded auctions with the 30 year bond which went off at 3.044. Ten year yield fell 3.8 to 2.275. Green eurodollar pack led to the upside closing +8.25. (Blues +7.125, golds +6.0). New contract high in January 2016 Fed Funds which closed 9964.5.
–Interesting article on MSN Money: The Trucking Business is Delivering Chilling News about the Economy
“In reality, over-the-road shipping volumes fell 5% in March from the prior year. It seemed like a fluke. But in April, according to the just released Cass Freight Index, shipping volumes fell again, this time by 2.5%. The index for shipping expenditures fell 3.5% in March and 4.7% in April.”
http://www.msn.com/en-us/money/markets/the-trucking-business-is-delivering-chilling-news-about-the-economy/ar-BBjMdjT
May 14. Dancing with the bond bear
–In spite of a mediocre employment report Friday, soft retail sales data yesterday, and solid demand for the US ten year auction, bonds continue to move lower. Bonds trade bearishly, not because of impending Fed hikes, but because the Fed is data dependent and the data is soft and the Fed may delay tightening. Stagflation. Steeper curve. The red eurodollar pack (2nd year) was up 4.375 yesterday, while golds (5th) fell 0.75. New highs in all deferred one-year euro$ calendar spreads, from reds back. New high in 2/10 to 169.5 and 5/30 to 149.5, both up about 4.5 bps on the day.
–Gold soared over $20 and Silver was up over 60 cents as the dollar continues to weaken. Ambrose Evans Pritchard of the Telegraph is calling it a reflation trade, but adds that it won’t last:
“Epic global bond rout is a QE success story – but it won’t last…
The sudden surge in bond yields is a victory, a sign that markets are finally starting to believe that central banks have defeated deflation”
–I would say it’s reflation without commensurate growth. According to the Atlanta Fed’s GDP Now model, Q2 growth estimate declined 1/10th to 0.7% yesterday. The Blue Chip consensus is around 2.9%. Guess who was right for Q1.
–Rather than conclude that central banks have won the war, my take is that the central banks may be losing control of the puppet strings guiding financial markets. Charles Prince once famously said we have to dance until the music stops. AEP says the bond rout can’t last. But I’ll take a dance with the bond bear.
–Today’s news includes Jobless Claims expected 275k. PPI expected +0.2 with Core +0.1. Thirty year bond auction.
May 13. 50% retrace levels in tens and bonds (yields) hold, for now
–Tuesday started with bond weakness across the globe, but as both tens and 30’s hit (and slightly surpassed) 50% retracement levels from the high yields of 2014 to the lows this year, the market found support and bounced. 50% levels are 233.5 in tens and 309.5 in bonds. (Tens ended at 225.8). Implied vol opened at new highs. For example, TYU 125.5 straddle, which was at the money on the open, was initially quoted 3’18/3’22. As the market rallied, the 126.5 straddle was sold at 3’04 and settled there (5.8 vol). By the end of the day, settlements in all interest rate futures were little changed.
–Today brings Retail Sales, expected +0.2 with Core +0.4. While consumer credit as a whole has had decent growth, revolving credit, which I believe is most closely related to retail sales, has been quite weak, though perhaps due for a rebound. Ten year auction today as well.
–From yesterday’s treasury budget: (BBG) “Individual income taxes, which make up 49 percent of the government’s receipts, are up a year-on-year 12.9 percent now 7 months into fiscal 2015. Corporate taxes, which make up only 9.3 percent of receipts, are up 11.8 percent.” With the booming growth in tax receipts, wouldn’t it make sense to think that the economy as a whole is firing on all cylinders? Or are tax payments siphoning growth away?
–In any case, it’s not all rosy in public finance, as Moody’s cut Chicago to junk. Just to put it in perspective, I think the GDP of the Chicago metro area is over $500 billion, about twice the size of Greece. (Although ex-greek restaurants, it’s probably about even).
May 12. WARNING. Faith in central banks beginning to crumble
–I guess the guy who paid a record price for Picasso’s “Les Femmes d’Alger”had to liquidate the bond portfolio to pay for it, sending global bond markets into a tailspin. The thirty year bond yield surged 13 bps to close over 3% (302.4). The ten year yield also jumped 11.5 to 226, taking out the high yield mark from March. Curve steepened to new highs with 5/30 up 3.7 bps to 144.2. In dollars, the red/gold pack spread rose a whopping 9.75 bps to 142.125 (also a new high).
–Just as implied vol was crushed on Friday’s brief rally associated with weaker than expected employment data, it rebounded Monday with TY vol back to 5.6. Still probably cheap at these levels. Speaking of employment, the Fed yesterday released its Labor Market Conditions indicator, which came out at -1.9, the lowest since June 2012. Should have been bullish for rate futures, but….no.
–Some analysts are suggesting that the prospect of Fed hikes is sending long end rates higher around the world. Yet the odds for hiking in 2015 are little changed between Friday and Monday, with only 1 hike of 25 bps being priced in. I would suggest something much more insidious: THE MARKET’S FAITH IN CENTRAL BANKS IS BEGINNING TO CRACK. Many people have warned that blind faith in policy makers would fray, but are having a hard time seeing it when it actually happens right before their eyes. It’s not that the Fed is going to be more aggressive in terms of tightening, it’s that they’re data dependent and their own Labor Mkt Conditions data is weak. So the Fed will be behind the curve, to use an overused cliche. And what happens? The curve steepens. IF this is the correct interpretation, and it might not be but is worth keeping in mind, then we are on the verge of some real fireworks…it could be a game changer for many asset markets.
–One other technical note on liquidity. Yesterday as the bond rout was getting started, there was a buyer of about 7k USM 153 put (36 delt at the time). He initially paid 62 when the bond contract was 154-08, but only bought a few thousand at that price and ended up paying to 1’01. The bond contract was driven down to 154-01 as market makers sold their hedges. The point is that an order equivalent to less than 3k futures contracts was able to move the market 7/32’s. Short gamma is NOT the way forward.
May 11. Fed to tighten this year? Dunno
–The employment report was disappointing to bond bears, with nonfarm payrolls up 223k and average hourly earnings only +0.1%. Though the data wasn’t far from published expectations, the market was obviously leaning short and there was immediate short covering. Yields were lower across the board with tens dropping 3 bps to 214.4. Open interest in eurodollars as a whole was down 94k and in TY was -13k though mixed in other treasury futures. Unsurprisingly, implied vol was spanked.
–The idea of near term Fed hikes seems to have evaporated. June/Sept eurodollar spread notched a new low of just 11 bps. June/Sept Fed Fund spread, which I had recommended buying at 7-7.5, ungraciously settled at 5.5. January 2016 Fed Funds once again settled at 9962.0, up 3.5 on the day and just 25 bps lower in price than May 2015 FF, indicating just one hike for 2015. October’15 FF at 9976.5 are forecasting less than 50/50 odds of a hike at the September meeting. “Don’t fire until you see the whites of their eyes”.
–China however, has no such problem in changing rates (otherwise known as lift DOWN) and this weekend chased the plunge in shibor by cutting the 1-year lending rate by 25bps to 5.1% and the 1-year deposit rate to 2.25%.
–Worth mentioning is that Greens (3rd year) were the strongest on the eurodollar curve Friday, settling up 10.125, but things steepened from there, with golds (5th year) up only 4.75. The 5/30 treasury spread continues to show strength, closing near the recent high at 140.5. Beware the back end of the curve…in both directions. We may see a tight range trade over the next few sessions, but there’s an undercurrent of instability.
May 8. Selling exhaustion Thursday; payrolls today
–In euro$’s, some of the calendar spreads had been strengthening for 7-8 days in a row…same with treasury spread like 2/10. Yesterday the air came out. For example, 2/10 had moved from 138 to 160.7 in eight sessions but yesterday fell back to 155.2, down 5.5 on the day. However, near one yr eurodollar calendars continue to close at new highs. For example Dec’15/Dec’16 closed up 1 at 90.0, the ninth day in a row without a negative close…it was 70.5 on April 24. These spreads are likely to pull back or at least pause, no matter what the data is.
May 7. US bonds and stocks lower this morning…
From a Reuters article: “I would highlight that equity market valuations at this point generally are quite high,” Yellen said. “There are potential dangers there.”
“We’ve also seen the compression of spreads on high-yield debt, which certainly looks like a reach for yield type of behavior,” Yellen said.
From another Reuters piece this morning: The Federal Reserve is sketching out plans to prevent an abrupt contraction in its massive balance sheet next year, when some $500 billion in bonds expire and risk disrupting markets and the U.S. economic recovery.
From Business Insider citing Morgan Stanley…the possibility of a TRIPLE taper tantrum:
If growth and inflation improve in both the euro area and Japan the way our economics teams expect them to, we expect a triple taper through:
i) Disinvestment of the MBS portfolio by the Fed some time in 1H16 (3-6 months after we expect the first rate hike in December 2015);
ii) A tapering of QE purchases in the euro area in 2H16; and
iii) A tapering of QE purchases in Japan in 2H16.
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Big moves overnight with the Bund yield at 64 bps, JGB at 43 (up 8) and US tens 228, now through the previous high yield of the year, set on the March employment release, or 224. In the US both bonds and stocks trading lower this morning. Markets globally feeling shaky, “the Shanghai Composite lost 2.7 percent, extending a three-day loss to 8.1 percent, the worst three-day performance in almost two years.”
Yesterday we saw slight new highs in the curve with red/gold eurodollar pack spread up 2.25 bps to 135.25. 2/10 treasury spread up 5.5 to 160.7. Implied vol still firming. Job Claims this morning expected 280 k.
RELATIVE BOND MOVES…
hTOP CHART is USZ 1987 contract. The sell off started in March 1987, and went over 20 points (from just below PAR to around 77)…until the October 1987 STOCK CRASH!
Of course, the contract at that time had an 8% coupon. The YIELD move during that time went from 7.5% in March 1987 to just above 10% in October.
So…the % in crease in yield was 33% (from 7.5 to 10%)
NOW….take a look at the lower panel. That’s the current bond contract. Topped in January 2015 around 171. Now trades 154-11. So around 17 handles.
The YIELD move has been 2.20 to 3%. Not even 80 bps, right?!?!?
BUT THE PERCENTAGE MOVE is 35%…. and it’s in a much shorter time frame…and some guys are saying the bear market has just started.
Still want the 401k 100% in the SP?
May 6. Bonds still heavy
–US rates continued to rise yesterday with the ten year yield up 4 bps to 217.3, having reached around 220 during the day. While that’s still below the high of the year set on the March employment release of 224, the long bond made a new high for the year at 290.5. Many eurodollar calendar spreads are also posting new recent highs. However, the peak one year spread, Dec’15/Dec’16 is still only 84; at the end of the year the peak one year was over 100 bps. There was an outright heavy seller of June’16 eurodollars yesterday from 98.985 to 98.975; the contract settled -3.5 at 98.95 with a jump of 109k in open interest. –While the press mostly continues to point to the idea of Fed rate hikes as the primary driver, January ’16 Fed Funds were only down 0.5 bp yesterday to 9957, just 30 bps higher in yield than the May contract, so the market is really only anticipating one rate hike and a small chance of another one before the end of the year. The rise in rates is more related to weakness in the dollar and the accelerating rally in crude oil. Uncertainty is rising, as indicated by the jump in implied vol treasuries; I marked July TY vol at 5.9 yesterday, up from 5.1 just last week.
–In terms of economic activity, ZH has this snippet regarding vice spending: “…gaming revenue on the Las Vegas strip fell nearly 10% in March after sliding 4.4% in February.” We know that Q1 was weak, but those are pretty large declines! Also, I didn’t read the story, but saw a headline which says that the City of Chicago is asking the teacher’s union to take a 7% pay cut. And they say Varoufakis is an unreasonable negotiator. Expect another few tenths of a second to be shaved from yellow to red lights, so the city can continue to plug revenue shortfalls with tickets.
May 5. 30 yr bond yield breaking out
–It wasn’t a particularly busy day Monday, but the US 30 year bond took its cue from the sell off in the German bund, and closed at the highest yield of the year, 287. The previous high of 284 was made on the employment release in March. (Same relative levels in the ten year are 224 for the March high and 213.3 close yesterday, so the breakout is only in the bond so far). USM yesterday traded from an early high of 158-05 to a low of 156-14. The 5/30 treasury spread closed at a new high for the year at 137 (up 5). 2/10 also at a new high 153.8 (up 2.5), and 5/10 at a new high just below 64.
–Option trade further confirmed the downside bias. New buyer of Blue Sept 9737/9800 combo (bought put) in size of 6k. Also a new buyer of 25k 0EZ 9850/9825 put spreads vs 9925 calls for 5.5 to 6.0 ref 9856-57.
–RBA cut rates to 2% though Aussie is up on the day. In another sign of weaker Chinese demand the Brazilian real is continuing its downward trend, softer this morning at 3.0865.
–Today’s news includes Internat’l Trade expected ($42.0b). Service ISM expected 56.5. According to recent data World Trade volumes are growing at the slowest average pace in 35 years. Baltic Dry Index also at or near the lowest level of the year.
