May 15. Move to lower yields continues….CPI today expected +0.3 with Core +0.1
–Yields took a tumble yesterday with tens falling 7.5 bps to 254. Near euro$ calendar spreads made new lows. The peak one year is still EDZ5/Z6, which fell 2 bps to 110.5.
–Since July 2013, the ten yr has been in a range of just under 2.50% to just over 3%. In the past three months it had been 260 to 280. Now it is testing the 250 area again, which is also the 38% retracement of May’13 low of 163 to the subsequent taper high of 303 (actually 249.3). 50% retrace is 233 which is around the 124 strike basis TYM. By the way, the same 38% retrace level for fives is 1.39%, vs 1.56 close yesterday. So if the prospect of tightening REALLY starts to fade then fives and green euro$’s have some room to run.
–EUR has broken 137 this morning (136.71) as GDP reports show France at 0 growth and Italy contracting, making a June ease that much more likely. A strong report out of Japan is attributed to consumer spending in front of the sales tax hike, but the Nikkei has fallen about 0.75%. Why? Because it’s going down, that’s why…and more QE isn’t going to save Japanese equities from here. You might think that 5.9% annualized GDP would be somewhat bearish for JGB’s…I checked Bloomberg. 59 bps. :-/
–However, in dollar options, positions continue to be adjusted that are predicated on tightening. Sev’l months ago there was a large buyer of Short Dec (EDZ5 underlying) 9875/9837/9800 p flies for 5.5. Yesterday, this position was rolled into 9900/9875/9837p flies around 30k. And of course Green June options hold the most open interest, with selling yesterday of 9825p (OI -49k to 265k) and buying of 9837p (OI +21k to 170k).
May 14. Treasury yields falling. Blackhawks beat Wild to take series.
–Weak Retail sales data pushed yields lower, reversing Monday’s fixed income sell off. Ten year fell 4 bps to 261.5. Green euro$ pack was up 5.5; large early buyers. Near one-year calendar spreads made marginal new lows. Notably, EDH5/EDH6 fell 3.5 bps to 90. There was heavy trade (50k) in EDH5/6/7 butterfly at -17/-16.5. Settled -17, range over the past month and a half has been -20 to -3.5. This morning’s prelim open interest shows a drop of 60k contracts in EDH5 and rise in EDH6 of 73k. Given recent activity (heavy buying EDZ5 and EDH6 outright), and new low in H5/H6, I think the fly trade was a sale. Good carry as the fly in front (Z/Z/Z) settled -42. H5/H6 printing 87 this morning.
–I would also note that EUR/JPY has pierced the 140 level as expectations grow for ECB easing; possible risk-off signal. EUR/USD has bounced slightly off yesterday’s test of 137.
–Having traded with an underlying bid throughout yesterday’s session, tens and bonds are breaking out to the upside this morning. Yield spread between German bund vs US ten yr has been near 5 year high of 123 bps (yesterday at 119), and now looks as if it might narrow. News today includes PPI expected +0.2 both core and headline.
–Crude oil gained 1.28 yesterday to just over 101.50. This year’s high of 104 likely to be tested.
May 13. Crickets
–Another light volume day Monday, though yields rose as stocks levitated to new highs. Ten year yield rose about 3.5 bps to 265.6. Red/gold pack spread up 3.125 to 253, right around the middle of last month’s range of 244 to 265.
-There were a couple of large trades yesterday. Buyer of TYM 124.5/125cs vs TYN 123.5/124 cs for 1/64 credit, selling July. This might have been a roll, but taken on its own merit might be worth a trade as the June call spread could easily fill out by expiration (one week from Friday), while the July wouldn’t, especially if the rally went just over the top strike in TYM.
–The other large trade was Green June 9837/9825/9812 put butterfly 1×2.5×1 in size of 40k x 100k x 40k, which appears to be a roll up trade. 2EM 9837 straddle settled 19.5, probably a reasonable level with one month to go given lack of movement.
–The widest one year spread remains EDZ15/EDZ16 at 114.5. For the past month this spread has only had a 10.5 bp range from 109 to 119.5. The area from 120-124 appears to be an insurmountable hurdle in the current environment.
–New today includes US retail sales expected +0.4. Data from China, production and retail sales, was lower than expected, calling into question the growth goal of 7.5%.
May 12. Should be a quiet start to the week.
–Fairly quiet day Friday. 5/30 treasury spread rose nearly 3 bps to 184, having bounced about 14 bps from the low of this calendar year which was set last Friday just below 170. This spread started the year around 220.
–Colleague John Brady sent an interesting chart this weekend noting that CRB Food Stuffs index has rallied some 23% since the beginning of the year! Of course, the ten year note also started out the year at 3% and is now hovering around 2.60. EU peripheral bond yields have collapsed this year as have US spreads. Bond markets globally appear to be pricing deflation rather than inflation. In spite of massive QE, and overwhelming debt, even Japanese tens remain anchored to a yield of just 60 bps. A Bloomberg article this weekend notes that China’s Xi says the country must adapt to slower growth as structural changes are implemented.
–The past week featured a fair amount of long put liquidation, especially in green euro$’s. There has been a gradual shift recently in levels of blue euro$ straddles relative to greens, where blues are higher on an absolute basis once again. For example, in April as the market geared up for the idea of a series of sustained FOMC rate hikes, the third blue straddle was 2 bps below the third green. On Friday green Dec 9787^ settled 59 compared to blue Dec 9712^ at 61. Just another reflection of a market that has moderated expectations of rate hikes and perhaps economic growth.
May 9. Markets and economists diverge on views of the economy
–From today’s WSJ: “The U.S. economy is speeding ahead this quarter—perhaps growing faster than 4%—as the recovery gets back on track after a winter when growth slowed to a crawl, according to The Wall Street Journal’s latest survey of economists.” I guess someone forgot to tell the bond market, as yields contuinue to drop, even after a lackluster 30 yr auction. While the ten year yield was only down a bit over 2 bps to 260, the green euro$ pack led the way, gaining 5.5 bps. Perhaps it’s not surprising that economists and interest rate markets differ, but stock indices are also telling different stories as money is gravitating to defensive names. While DJIA and SPX are near the highs, the Russell is 9.5% off the high made in early March, and the Nasdaq is down nearly 7.5%.
–Implied vol continues to compress with TYN 124 straddle at 129, just 4.3%. EDH5 9962^ was sold and settled at 16.5, not exactly indicative of a Fed “in play”. Short Dec 9900^ also under assault, sold at 41.
–Big reversal in EUR yesterday as Draghi indicated an ease in June. This morning’s weakness in German exports underscores what Draghi mentioned yesterday, a drag on growth and inflation due to a strong currency. EUR is again lower this morning nearing 138 after a high near 140 yesterday.
–I would think that the stance of central banks with regard to keeping short end funding costs near zero would lead to a much steeper curve, but the bid in the US long end is relentless. Worth a mention though, is a 50k put spread buyer in Blue March, paying 4 for the 9612/9587 ps.
May 8. Yellen to continue accommodative policy
–Once again yields fell yesterday, as Yellen signaled a continuation of highly accommodative policy. She noted…” the recent flattening out in housing activity” as a possible concern. At the end of her speech she cited a goal of financial stability, and concluded that risks are minimal, shrugging off “reach for yield” behavior seen, for example, in tightened credit spreads. Eurodollar options traded accordingly, with wholesale exits of puts (even before the speech was officially released). Green July 9800, 9787 and Green Sept 9775 puts were sold in size of 10k, 20k and 20k. Late selling of Green June 9862/9837 p spreads at 16. Consistent selling of red midcurve Dec premium, with 9900 straddle sold at 42 (settled there). Most eurodollar sraddles fell 1-2 bps. Late new buyer of 10k TYU 124c for 51.
–ECB meets today. In the US news includes Job Claims expected 330k, and the 30 year auction. (Bonds were an underperformer yesterday). Also several Fed speakers on tap.
–Consumer credit released yesterday afternoon was a huge $17.5b, though once again student loans (non-revolving) are the primary category of increase. Non-revolving was up a bit over $16b while credit card debt rose only 1.1b. (MarketWatch) — Interest rates on federal Stafford student loans will rise to 4.66% for undergraduate students next year from 3.86% in the prior year. The interest rate is pegged annually to an auction of 10-year Treasury note which sold at 2.61 yesterday. Spending from student loans and 401k’s are underpinning US economic “strength”.
May 7. Stein talks about volatility associated with Fed’s communication; Yellen speaks today
–Theme yesterday was dominated by put selling that appeared to be mostly position exits. For example, 30k Blue July 9687 puts were sold at 6.0. Curve had a flattening tendency as stocks gave ground. Red/gold pack spread made a new low at 244 (-3.625 on the day, and as low as it has been since last June), as buying continues at the long end of the treasury market. Large buyer of TYM 124.5/125/125.5 c fly appeared to be a roll up of a short call spread.
–Yellen speaks before Congress this morning, which will be followed by the ten year auction (current ten year ended just below 260 yield). Outgoing Fed governor Stein addressed market volatility with respect to Fed actions, but said “We are currently in a very good position with respect to the market’s expectations for our asset purchases”. Another interesting quote, especially given Yellen’s speech today: “There is always a temptation for the central bank to speak in a whisper, because anything that gets said reverberates so loudly in markets. But the softer it talks, the more the market leans in to hear better and, thus, the more the whisper gets amplified. So efforts to overly manage the market volatility associated with our communications may ultimately be self-defeating.” I would expect Yellen to continue to whisper about the weaker aspects of the employment situation in the wake of last Friday’s 6.3% rate.
–Factors outside of the Fed’s control can also exert a huge influence on the markets. For example, Japan stocks were down nearly 3% today. Geopolitical tensions in Asia are on the rise, as Vietnam objects to a Chinese oil rig in disputed waters. As the quest for natural resources increases the chance of a military flare up in Asian seas increases.
May 5. Curve flattens to new low after employment report
–Employment aftermath. Here’s the headline from WSJ about Friday’s report: Jobs Growth Jumps as Economy Gains Steam…U.S. employers in April added jobs at one of the fastest paces of the recovery, rekindling hopes for an upturn strong enough to alleviate the economy’s longstanding ills.
And here’s the Telegraph’s Ambrose Evans Pritchard (AEP): “The US economy has delivered two minor shocks in a week, prompting concerns that bond tapering by the Federal Reserve may be doing more damage than expected. Non-Farm Payrolls data released on Friday shows that the workforce shed 806,000 jobs in April, a stunning drop that cannot plausibly be blamed on the weather. Wage growth and hours worked were both flat and the manufacturing hours per week fell.” Note: AEP cites workers dropping out. From BLS report: “The civilian labor force dropped by 806,000 in April, following an increase of 503,000 in March. The labor force participation rate fell by 0.4% to 62.8% in April.
–So what do the markets think? Immediately after the data the WSJ theme was embraced. But by the end of the day the latter viewpoint prevailed; 2/10 made a new low of 216.5 (-3.5 on day and 7 bps on the week), 5/30 made a new low just under 170. Red/gold euro$ pack spread plunged 8 bps to just under 245. 30 yr bond futures made new highs, yield dropped 4 to 336.5. Stocks were nearly unchanged. The other theme that is probably partially responsible for the relentless bid in the long end is lack of wage growth and the deflationary pall cast by China’s weakening currency and economic slowdown. With China’s economy now nearing the size of the US, the prospect of much slower growth will send shockwaves through the developed markets. Consider these quotes from one of China’s top real estate developers: “In 1990, Tokyo’s total land value accounts for 63.3pc of US GDP, while Hong Kong reached 66.3pc in 1997. Now, the total land value in Beijing is 61.6pc of US GDP, a dangerous level,” said Mr Mao. …Mr Mao said China’s house production per 1,000 head of population reached 35 in 2011. The figure is below 12 in most developed economies “even when the housing market is hot; no country has a figure of greater than 14”.
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100027199/chinese-anatomy-of-a-property-boom-on-its-last-legs/
–Volume in the interest rate complex was extremely heavy Friday, with all futures contracts posting sizable gains in open interest. For example ten year OI was up 41k. In spite of what may be considered as tinder for the next big move, implied vol declined. For example, TYM 124.5^ settled 1’00 from 1’12 Thursday with futures unch’d. TYN straddle from 1’47 to 1’40. With two weeks left until expiration, Green May 9837^ settled 12.5, and Blue May 9737^ settled 14.5, this with Friday’s ranges having been 14.5 in EDM6 and 19.0 in EDM7. Given that action late Friday had dwindled to a barely audible hum, perhaps the premium levels are appropriate. However, Yellen is in front of Congress on Wednesday, and of course the Russia/Ukraine situation is still simmering.
–There was one very large euro$ trade worth mention…new position. Seller of 80k 0EN 9900/9875ps 3.0 vs buyer 40k each 2EN 9775/9750ps 6.0 and 3EN 9687/9662ps 6.5. Steepener.
May 2. Nonfarm Payroll Day
–30 year bond contract (USM) pushed to new highs in front of today’s employment data, while tens and stocks are near new highs. Bond yield fell over 5 bps to 340.5. Ten year yield fell another 4 bps to 260.5, and 2/10 treasury spread made a new recent low at 220. Red/gold pack spread down 5.25 to new low just under 253. Like the ten year yield, red/gold has ranged between around 250 to just over 300 since last June, and is now testing lower levels.
–NFP expected 218k with average hourly earnings +0.2. There was heavy put buying yesterday, but given price action, it feels as if there is a large short base that will use any downtick to square up.
–In a year where many have been expecting global growth to accelerate, the move to lower yields has been painful. I had seen an article a few days ago which suggested that large private pensions were becoming closer to fully funded, causing rotation out of riskier stocks into longer dated fixed income…but stocks aren’t particularly weak. Another article yesterday on BBG (Liquidity Trap Hitting AAA Bonds…) said that even EU sovereign bonds were becoming less liquid due to regulatory concerns, which perhaps spurs a move to US at the margin. There is also a BBG article today: Yellen’s Fed Resigned to Diminished Growth Expectations. “No longer are they saying growth must accelerate from the 2 percent to 2.5 percent pace it has generally averaged since the recession ended. Instead, they are stressing the importance of preventing the expansion from faltering.” So maybe it’s just that…a world resigned to lower growth and regional conflicts.
–Note: It was announced yesterday that Yellen will appear in front of a House Committee next Wednesday morning.
May 1. Bonds rally as Fed continues tapering
–Wall Street Journal: Fed Cuts Bond Buys, Sees Growth Pickup. Well sure, not too hard to predict a growth pickup from Q1’s dismal 0.1 print released yesterday morning.
–Tens and bonds closed at the high of the day after an initial dip following the FOMC statement. Ten year yield fell around 4.5 bps to 264.5, TYM closed 124-13.5. There are a few highs in the last 2 months in TYM just above 125 (since early March). Last employment report saw a low of 122-22.5, the low since then has been 123-16. The path which will create the most pain appears to be toward lower yields, which is especially perplexing given new highs in DJIA. Since early Feb the low yield prints have been between 258 and 262…getting close. Range for the past three months has only been 258 to 280.5.
–Corporate borrowing has been strong, though it hasn’t translated into capital investment. Mortgage refis are plunging. Credit spreads are tight. Low rates and QE programs haven’t provided the spark to the economy and Asia now seems to be a restraining influence rather than growth catalyst.
–Internals of the GDP report were terrible. (ZH) Growth would have been negative if not for spending associated with Obamacare. (GS)- Wages and salaries also grew 0.3% in Q1 (vs. +0.5% in Q4) and an even slower 0.2% in the private sector. On an unrounded basis, wage and salary growth was the slowest in the 32-year history of the series.
–Today brings Job Claims expected 320k, Personal Income and Spending +0.4 and +0.6. ISM 54.2.
