March 3. Yields jump Monday as Friday’s payroll data looms
–Yields jumped yesterday with tens up 8 bps to 208 (the high from the middle of last month was 214). Stocks made a new high as did the dollar index. The peak one-year euro$ calendar spread, Sept’15 to Sept’16 rose 4.5 bps to 91, still below last month’s high of 92.5. Interestingly, open interest in the ten year note future was down another 13k, though up 20k in fives. Ordinarily one would want to see increases in volume and open interest as confirmation of the move to higher yields, but that evidence is mixed so far. In any case, the market remains on the defensive going into employment data at the end of the week.
–Curve was steeper with red/gold up 4.5 bps to just under 127. 2/10 treasury spread also up 4.5 to 142.2.
–German retail sales were up a stronger than expected 2.9%, according to Reuters the “sharpest increase since January 2008.” However, the euro is still trading below 112 and EURJPY is sub 134. I suppose the weaker euro should help German exporters like BMW, who now apparently think they can sell what looks suspiciously like a Chrysler Town and Country minivan to their core US consumers. http://www.detroitnews.com/story/business/autos/2015/02/14/bmw-pushes-model-range-envelope-seat-minivan/23411385/
–Netanyahu’s speech before Congress tonight.
–Interesting article on Business Insider from Blackrock noting the general decline in productivity data.
http://www.businessinsider.com/american-productivity-is-stalling-2015-3
March 2. Corporate buybacks funded with debt boost stocks, but increase risk
–Yields eased Friday with tens down 1.7 bps to close at exactly 200 bps at the futures settlement. Back month eurodollars were up 3-3.5 bps. Somewhat interesting to note that USDCNY had made a new high Friday over 6.27, and on Saturday the PBoC cut rates for the second time in three months, (not that anybody could have known…) Again, the slowdown in China coupled with a weaker currency means deflationary exports to the US.
–Open interest in treasury futures was once again down right across the board with TU -26k, FV -28k, TY -31k, US -19k and WN -5k. Though the roll of March contracts is probably the main factor, these are total open interest numbers.
–From the Fed’s Vice Chair Stanley Fischer on Friday: “I know of no plans to behave by following one of those deterministic paths for the next three years,” Fischer said. “I expect that our interest-rate policy will continue to be data driven, and that interest rates will be set at each meeting on the basis of what the FOMC believes will best enable us to meet our dual goals” for price stability and full employment. (BBG)
–Fischer is trying to move the Fed and the market away from the idea of pre-determined rate moves, perhaps to inject a bit more uncertainty and market discipline into the mix. Certainly he wants to get away from the zero bound. I would suggest that some of the reason might be due to concerns about financial stability.
–In that regard, I would note a couple of things. First, Moody’s downgraded Chicago’s debt to Baa2 Friday and warned it could fall further. (Reuters) – Chicago drew closer to a fiscal free fall on Friday with a rating downgrade from Moody’s Investors Service that could trigger the immediate termination of four interest-rate swap agreements, costing the city about $58 million and raising the prospect of more broken swaps contracts. [Get ready for the city to shave another few tenths of a second off yellow lights to boost red light camera ticket revenues]. The much broader question is, does the piper EVER get paid? Will the city and Illinois ever tackle the pension and other problems to dig out? It’s really a global question.
–Low rates didn’t cause Chicago’s problems. But higher interest costs are going to accentuate them. Near zero rates are creating fault lines in other ways though. There was a fascinating zerohedge article over the weekend citing Goldman and DB research noting record stock buybacks which have almost single-handedly created the bid for equities. http://www.zerohedge.com/news/2015-02-28/here-reason-why-stocks-just-had-their-best-month-october-2011
Certainly, safe haven flows from non-US investors are another factor, but the article notes that in 2014 net equity inflows were $415B from corporations and just $103B from foreign investors. In conjunction with these figures (though not from the article) are the Fed’s flow of funds data. As of the end of Q3 2014, Corporate debt outstanding is a record $7.438T, up $404B yoy at a rate of 5.5%. Net equity buybacks are almost exactly equal to the increase in corp debt. The conclusion of course, is that companies are simply substituting debt for equity, thereby making earnings comparisons look good, but increasing risk. Shouldn’t corporate debt be used for new technological investments? Even if companies are funding capex (at its abysmal rate) out of cash flow, the article further notes that expected corporate revenues will show a yoy DECLINE in 2015. Is this dynamic part of what Fischer wants to lean against?
Feb 27. Dudley and Fischer today
–The voices on the Fed that really matter are Yellen, Dudley and Fischer. Yellen testified this week, now Dudley and Fischer can provide fine tuning.
–Treasuries opened higher Thursday, but had an outside day and closed near the lows as the week’s treasury auctions ended with a tepid 7 yr. Though price action was bearish, open interest in all treasury futures besides tens (+11k) fell on the day. Additionally, implied vol was marked down, punctuated by a late seller of 3k TYM 125/129 strangles at 1’24. With a futures close of 127-20.5, that’s approx a 50 bp wide strangle, 16 bps from the call and 32 from the put. I marked TYM vol at 5.8, a new low. The fact that both open interest and implied vol are easing does NOT confirm the move lower in prices. [Open int changes: TU -47.7k, FV -49k, TY +11k, US -38.5k and Ultra -18k from prelim sheets]
–The euro plunged to 1.12, the lowest level of the month. Crude oil also closed at the lowest level of the month near $48/bbl in CLJ. This morning USD/CNY is making a new high above 6.27. The stronger dollar in general should be supporting treasuries, but if China really starts to let its currency depreciate, then even stronger disinflationary pressures will be headed to US shores. However, the spread between ten year treasuries and tips actually made a new high according to my marks, at 180 bps. So as usual, there are mixed messages.
–Interesting note from Albert Edwards yesterday: “Wall Street analysts are chopping their profit forecasts so broadly that a 6-month rate of change for estimated profits is now negative; current rate of earnings deceleration usually linked to recessions, writes Societe Generale global strategist Albert Edwards in note earlier, citing data from IBES for February.”
–Dudley, Mester and Fischer all speak today in NY, especially important will be Fischer. Speech – Vice Chairman Stanley Fischer
Conducting Monetary Policy with a Large Balance Sheet
At the 2015 U.S. Monetary Policy Forum, New York, New York
1:30 p.m. ET
–Other news includes Q4 GDP revision expected 2.1 from 2.6, and Chicago PMI exp 58.7.
Feb 26. The tree of the FF target vs the forest of global bond buying
(Reuters) – German seven-year bond yields fell below zero for the first time ever on Thursday, as investors positioned themselves for an extended era of cheap money ahead of the European Central Bank’s looming bond-buying scheme. Bloomberg reports that Portugal’s tens are below 2%.
–In the US, the ten year yield fell again yesterday by a bit over 2 bps to 196.5. Longer dated maturities outperformed, with red/gold euro$ pack spread down 3 bps, reds -0.875 and golds +2.125. There was premium selling across the board, notably a sale of about 50k EDM5 9962.5 straddles from 11 to 10.5 (ref 9962.0). Note that the June FOMC is on the 17th, but EDM5 expires June 15, so there might not be 100% certainty of the outcome priced into the contract at expiry. On the other hand, the Fed is so fearful of creating any market ripples, perhaps June’s FOMC result will be telegraphed by late May. It’s the forest for the trees…there’s much hand wringing about the Fed’s first change in FF, while bond yields are dropping all over the world due to a shortage of collateral given bond buying “schemes” globally. At the same time, the inevitable downgrades of energy related companies continue, like Brazil’s Petrobras (PBR) and Transocean (RIG), cut to junk by Moody’s.
–Today’s US news includes CPI, expected -0.6% with negative Core as well, -0.1. Durables expected +2.0 and Jobless Claims 290k. Seven year treasury auction, providing stark contrast with Germany at zero and the US around 175.
Feb 25. Fed rate hikes? Not so fast…
–“Yellen puts Fed on path to lift rates” is a headline from today’s WSJ. Ordinarily, one might think that yields would have risen given that ‘news’ in the wake of Yellen’s semi-annual testimony before the Senate. However, yields dropped, with the ten year note now back below 2%, at 198.8 late yesterday, down 6.6 bps. And, it wasn’t all due to curve flattening, as 2/10 fell only 1.6 bps to 139. Rates fell across the curve. Specifically relating to Fed policy, note that August Fed funds rose 2.5 (in price) on the day to settle below 25 bps at 99.755, only 13 bps higher in yield than the expiring Feb contract. So, in a simplistic sense one could say that the market is pricing in around a 50% chance of a rate hike at the June or July FOMC. The October contract at 99.645 is almost 25 bps above the current 12 bps fed effective average rate; excluding the next two meetings which are off the table for a hike, there are meetings June 17, July 29 and Sept 17. So call it certainty for 1 out of 3.
–Though treasuries moved to higher atm strikes, implied vol was down. For example, on Monday TYM 127.5 straddle had settled at 3’06, but yesterday the 128.0 straddle closed at 2’63 at 6.0 vol. Previously, given elevated call skew, as straddles moved to higher strikes their absolute values also moved higher. That’s not to say that demand for calls still isn’t evident, as there’s a buyer of TYM 130 c almost every day, adding 8k yesterday bringing open interest to 62k in the strike. It’s simply that upside fear isn’t as pronounced in terms of skew.
–There’s probably more that can be said about Yellen, including her surprise notation (to me at least) that risks from international markets weren’t all in one direction as Central Bank policies could spur growth overseas as well. It’s all about the steady hands of the world’s CBs… But another interesting point was made to me by a friend (thanks DK) regarding labor and wages, specifically that Walmart’s wage increases could spur other companies to raise pay and thus provide more evidence of rising labor demand and increased inflation pressure. I’m not so certain of that conclusion, but I did find an article from mid 2013 noting the largest ten private US employers, of which WMT is the largest at 1.3m domestic workers. Here is the list: http://www.usatoday.com/story/money/business/2013/08/22/ten-largest-employers/2680249/ It’s a bit heavy on fast food and retailers, with Yum Brands, McDonalds, Target, Kroger and Home Depot also in the top ten. But as of 2013 Hewlett Packard was also on the list, with 332k employees. However, a headline on this morning’s zerohedge says that HP has cut 44k jobs to date. (Maybe they can become Home Depot greeters or SnapChat technicians). In any case, given the Fed’s obsession with labor markets, it’s an interesting topic to delve into…and one more point: Obama yesterday vetoed the Keystone pipeline which many claimed would bring needed high paying jobs.
–Today’s news includes New Home Sales expected 471k and the 5 yr note auction. Yellen in front of the House today.
Feb 24. Yellen in front of Senate banking Committee
–The curve flattened Monday with tens down over 7 bps to 265. Red/gold euro$ pack spread fell 4.875 bps to just over 125, with reds +4.25 and golds outperforming +9.125. Treasury implieds were little changed in front of Yellen’s testimony today, although there continues to be call accumulation, moving down a strike to TYM 129.5c yesterday. Some risk reversals buying calls in both April five years and Green June dollars.
–Yellen begins her testimony in front of the Senate banking committee today with stocks near all time highs, and the dollar continuing to show strength. Oil and EUR are right around the same levels as late January’s FOMC meeting, however stocks are higher as are ten year yields. Yellen is likely to stress data dependency and gradual actions, and will likely touch upon international risks (as noted in the last statement) and financial stability. I think she is likely to dismiss disinflationary concerns. In terms of financial stability, the rise in stocks and decline in junk bond spreads is perhaps indicative of “yield reach” which may be a concern. I think that her comments might lean slightly more hawkish overall, but I am in the minority with that view.
–Greece submitted their proposals for reforms which will likely provide a basis for ongoing negotiations. Treasury auction of two year notes which should find solid support.
Feb 23. Yellen tomorrow. Bonds trade long and heavy.
Feb 20. Markets position for today’s Greek/German negotiation and next week’s testimony by Yellen
–The standoff between Greece and Germany continues today with a meeting at 9 EST (that will probably lead to an extension into next week). The dollar was generally firmer yesterday, EM currencies are still under pressure, with Brazil for example, nearing a new low.
–In US rates yesterday, implied vol continued to press higher. Buyer of 8k TYM 130c for 41 covered TYH 127-25 (or 127-03 in TYM), adding to longs, 53k in open interest this morning. Also some new long positions in dollar options. However, yields were higher on the day, with tens rising 5.5 bps to 211.5 and eurodollar calendar spreads posting new highs. Red/gold pack spread rose 3.625 to close above 130, and 2/10 was up 3 bps to 149.4, both new recent highs.
–I would think that firmness in the dollar and in implied vol in treasuries might be defensive posturing for a negative outcome at today’s meeting, but if that were the prime motivation then yields should have had a downward bias. Going into next week’s testimony by Yellen, the treasury market is under pressure, leaning toward a hawkish tone.
–In dollars, blue straddles are bid relative to greens. For example, 3EH 9762 straddle settled at 25.5 while 2EH 9812 settled 23.5. Three weeks to go for the March midcurves. So far in the month of February the range in EDH17 (green march) has been 9857.5 to 9805. Given next week’s H-H testimony and the possibility of Greek negotiations failing, I would say that 23-24 bps for the green straddle is a bit on the cheap side.
–March treasury options (and all the teenies that were bought for cab7) expire today. Tens appear to want to peg the 127.5 strike.
Feb 19. Is the Fed afraid of losing ‘control’ ?
–Wednesday began with a test of the 217 yield, the 38% retracement of the move from the end of 2013 to January of 2015, from 303 to 164. There were technical bids at that level that held. The day was fairly quiet going into the FOMC minutes, but the headline blaring “Many Fed officials inclined to stay at zero longer” caused a ripping rally in interest rate futures. TYH jumped from 127-15 to 128-08 and then settled back. Ultimately, the ten year cash yield fell about 8 bps to 206. While the headlines were decidedly dovish, in reading the minutes I was struck by the generally positive economic tone, though international risks were acknowledged. I was further amazed by the hand-wringing over taking out the word “patient” and the possibility of markets “overreacting”. Such a debate reflects institutional hubris. The dots have been far off the market since inception. Does the Fed really think that minor tweaks in communication cause lasting adjustments in interest rate markets? I guess the taper tantrum episode in summer of 2013 made a deep impression.
–It’s worth taking a look back at 2004. The first actual hike was on June 30, from the then low FF target of 1.00% to 1.25. The EDU04 contract went from 9864 on April 1, to 9800 on May 14, a 64 bp move prior to the actual rate hike. That’s what markets do, anticipate and adjust. So, at 9864, the contract was about 36 bps above the Fed effective. Now EDU15 is 9942, about 46bps above the current Fed effective rate. So in historical context I don’t think things are way out of line for a coming rate hike. The Fed’s preoccupation with financial stability is misplaced. Not that we may not see enormous financial INSTABILITY, I think we will, but the Fed is unlikely to spark it just by changing a word…it’s much more likely to arise out of the global debt implosion at negative rates.
Chart of EDU 2004. First Fed hike on June 30
–There were some large buys in interest rate futures prior to the minutes. For example, a new buyer of 10k TYK 127/130/133c fly for 38 (settled 43). Also large outright buys in dollars. Implied vol in treasuries firmed. The TYM 126.5 (atm) straddle settled 3’05 on Tuesday, but the TYM 127.5^ settled 3’11 yesterday.
–News today includes Jobless Claims at 290k, Philly Fed expected 8.2 from 6.3, and Leading Indicators, expected +0.3. Maybe the drop in oil prices hasn’t had much of a negative effect on the US, but the Bank of Mexico cut its growth forecasts due to lower oil prices and less final demand.
Feb 18. US Yields SURGE! Big Trouble in Little China
First, here’s a link to my favorite compilation of economic charts from Business Insider:
http://www.businessinsider.com/bi-most-important-charts-in-the-world-2015-2#
Interesting themes are: the onset of US wage increases, budding growth in the EU, problems in CHINA
–Yesterday yields exploded higher, with tens up 12.6 bps (from Friday) to 214.3. The 38% retracement from the high of 303 at the very end of 2013, to the low this year of 164 is 217; the area from 217 to 220 should be strong support for the futures contract. Nearly all euro$ calendar spreads made new highs as the curve bear steepened. Red/gold pack spread surged by 9.25 bps to 127. The peak one-year calendar, Sept’15/Sept’16 rose 5 to 92.5 bps. There was some notable straddle buying, for example Blue March for 25 and 25.5, and in the TYM 127 and 126.5 strikes for 3’04 to 3’06, but implied vol was somewhat subdued given the magnitude of the underlying move in futures. Waves of selling appear to be driven by hopes of a Greek extension deal, long liquidation, and curve flatteners being exited.
–Every crosscurrent of economic news is on display this morning with the dominant factor (in terms of US rates) being domestic wage growth. If wages truly begin to accelerate then the Fed’s last excuse for restraint falls by the wayside. There are several charts on the BI site that show possible improvement in wages, and this was a BBG headline today: (Bloomberg) “U.K. unemployment fell to its lowest rate in more than six years as pay growth picked up in the fourth quarter in a sign that pressure on labor costs may be starting to build.” FOMC minutes from the last meeting are released this afternoon.
–One of the other BIG global themes is that of currency debasement, also on display this morning as Indonesia unexpectedly cut rates (leading to a weaker rupiah) and the RBA’s Stevens overtly referred to the benefits of rate cuts in weakening the Aussie$. Japan was the first to take the devaluation plunge with massive QE, the ECB is now joining, but the real pressure is building on China as $/CNY is at the top of its range at 6.255, and appears ready to bust out to the upside. A weaker currency in China will export another round of global deflation in my opinion. Again, there are several references in the BI charts, but here’s a headline from today’s WSJ: “Pressure builds to weaken yuan…Investors see more pain ahead for the Chinese yuan, as pressure mounts for Beijing to address slowing growth by devaluing its tightly controlled currency.”
–One last note in relation to the US economy is growing loan delinquencies in auto and school debt. From FT: ”
Two categories of loans showed worsening payment records, however. By far the worst delinquency rates are in student loans, where 11.3 per cent were overdue by 90 days or more. That was up from 11.1 per cent in the third quarter.
More individuals had problems with auto loans too, the figures showed, with the delinquency rate rising to 3.5 per cent, from 3.1 per cent in the previous quarter. This comes as the number of auto loans made to borrowers with poor credit histories increases.”
Big Trouble
http://www.imdb.com/media/rm2560466432/tt0090728
