March 15. Treasury rates surge
–Huge jump in interest rates yesterday. Ten year treasury rose 15 bps to yield 2.27. Fives were up 13 bps to 1.11%. Curve steepened. 2/10 treasury spread made new high for this year, up 10 to 188. All eurodollar calendar spreads made new highs. As an example, EDZ12/13 which I bought early in the year at 9.5, settled 32, up 7.5 on the day. (I sold mine out at 12).
–The big March midcurve put buyer saw futures cut through the strikes like a hot knife through butter. Blue march 9850 put were bought Tuesday for 2 when futures were 98.595, the contract settled 9841.5, the puts settled 10.25, for a gain of 5x. Easy. Same with 2EH 9912p…bought for 1.0, now 13 in the money. March midcurves expire Friday.
–Yen continues to fall with USD/JPY now 83.86, a huge straight move from 76 in the beginning of February. JGB’s had a good sell off yesterday as fundamentals are finally catching up to Japan.
–Today’s news includes Jobless Claims expected 355k. PPI expected +0.5 with Core +0.2. Philly Fed 11.5 from 10.2.
–There was a post on ZeroHedge positing that the recent avalanche of corporate supply is what has finally turned the tide in the treasury market. Another post on Calculated Risk notes a decline in LA Port traffic, which is another clue in the China slowdown story…and less exports from China probably means that there are fewer dollars to be recycled into US treasury bonds.
–A couple of notes about midcurve March euro$ options which expire tomorrow. All near put strikes saw large declines in open interest, which suggests profit taking. 2EH 9887p, 9900p and 9912p saw declines of 11k, 21k and 28k. 3EH 9850p fell 8k. There was a buyer of about 10k TYJ 130p…open interest there fell 7k.
March 12. US considers selling strategic oil reserves…to China?
–Stronger than expected employment data (NFP 227k and previous revised higher to 284k) sent interest rates higher Friday, though closing losses were modest. Tens ended at 2.04%. Today brings a three year note auction, followed by tens and 30-yr bonds Tuesday and Wednesday. Retail Sales and FOMC announcement tomorrow. Statement is likely to sound the same cautious notes as January’s.
–China posted a trade deficit of $31.48 billion in February after reporting a $27.28 billion surplus in January. February is seasonally weak but exports slumped suggesting weaker growth for China as world demand eases. Oil imports were strong as China builds reserves (while the US considers selling from strategic reserves to mollify voters). The ultimate equation of China selling US bonds back to the Fed who will tuck them into the QE portfolio, so that China can buy oil essentially transferred from US SPR, probably won’t do much for prices at the pump.
–In a reminder that US municipal finances are still shaky, Reuters reports that “Pennsylvania’s distressed capital city, Harrisburg, will skip $5.3 million of debt payments due next week, the first time the city has defaulted on its general obligation bonds, to ensure there is enough cash to fund vital services.”
March 8. Deadline for Greek debt swap agreement
Quiet session Wednesday. There was an early seller of about 6k TYJ 131.5 straddles from 113 to 111 as news from Greece suggests agreement from bondholders on the debt swap. Hilsenrath from the Wall Steet Journal floated a story that the Fed is working on a new sterilized bond buying program, which immediately had the desired effect of a jump in gold prices. FOMC meets next week.
–There continues to be sizable put buying in front of tomorrow’s employment report. Blue Dec (3EZ5) 9800/9700 put spread was bought for 19.5/20 in size of 40k….new position. EDZ’15 settled 9822. There was also some buying of green/blue pack spreads. Red/green pack spread settled 32, while green/blue settled 59.6. The market continues to accept the Fed’s vow of low rates for the next three years, and sets shorts just beyond that time frame.
–Jobless Claims expected 351k. Business Insider outlined their new methodology for predicting NFP, which derived an estimate of 285k, much higher than market expectations of 200k.
–Rhetoric concerning the slaughter in Syria has been increasing, with McCain calling for US involvement to topple Assad. The stakes are a lot higher, with Putin solidifying Russia’s resistance to interfere. The Chairman of the Joint Chiefs of Staff was quoted in a BBG piece noting that Syria has “five times more sophisticated” air defenses than existed in Libya. “The ability to do a longer-term sustained campaign would be challenging and would have to be made in the context of other commitments around the globe.”
March 6. Equities weak….
. Stocks are decidedly weaker this morning with SPH -11 at 1353.50. Thursday’s deadline for private participation agreement to the Greek debt cramdown is looming. A disorderly default remains a possibility. It seems to me that uncertainty is not really being reflected in option pricing. VIX was up only slightly yesterday to 18. Treasury vol had a modestly firmer tone. The front end of the eurodollar curve gave back a few bps of the recent rally, and there are still some put buyers on EDM2; April 9937/9925ps bought for 0.5 10k yesterday. If the Greek deal is in jeopardy a good way to play it is with long outright puts on EDM. There are now constant news stories about revamping the system for setting LIBOR, and the european banking complex would likely be seriously compromised if the Greek default gets ugly. EDM 9925p are only 1.5/1.75. I’m not making any recommendations here, but I will say that I bought some for myself.
–Headline from the Financial Times: Scramble to sell US debt as yields hit record lows / Busiest day of issuance this year.
–In local news the G8 summit in May was moved from Chicago to Camp David, as Obama said he wanted a more “intimate” setting. I don’t know what could be more intimate than a confrontation between Chicago Police and protesters. “I suggest you use your nightstick, officer.” (as Billy Ray Valentine says in Trading Places).
March 2. Saudi oil pipeline explosion rumor causes surge to $110/bbl
March 2. Curve continued to steepen yesterday with ten yr yield gaining 5 bps to 2.03%, 2/10 up an equal amount to 174. In the space of three sessions red/gold pack spread went from from 146 to 162.5 (up 7 yesterday). Many one-yr eurodollar calendar spreads made new highs, for example EDZ12/Z13 rose 3.5 bps to 21.5. Option activity now favoring put buyers in greens and blues. Market feels vulnerable to higher rates; there may be more defensive positions taken prior to next Friday’s employment report as tens probe the higher end of the past several months yield range at 2.06%. Firmer vol at the longer end of the maturity spectrum supports this view.
–A rumor of an explosion at a Saudi oil pipeline caused April crude to jump to $110/bbl late yesterday, up nearly $3. The news was apparently from an Iranian source and was denied by the Saudis but the violence of the move gives an indication of sensitivity about further supply disruptions.
–Fed’s Evans and Bullard speak today. Evans always dovish but Pianalto yesterday was restrained: “There’d have to be a significant change to my outlook to change my position on policy at this time,” she said in rare press briefing. (Reuters). Fed sponsorship of longer treasuries in the form of QE3 may be increasingly in doubt.
–Yen continues to weaken to new lows, EUR/JPY has surged from 97 to 108.50 in the past month and a half.
March 1. Bernanke comments cause markets to worry about QE3 prospects
–Gold and silver were crushed after Bernanke comments yesterday, with GCJ down $75 late. (GLD -9% and SLV -6.4%). Financial Times describes Bernanke as “downbeat” while WSJ said “cautious”. The market was apparently disappointed that QE3 wasn’t overtly touted. SPH had a key reversal, new high, outside day, close lower… but the range wasn’t very large. Everything that has rallied, (metals, stocks) can at least partially credit central bank money pumping. The ECB peaked yesterday with the LTRO, and the Fed is perceived as being reticent to stay full throttle. Inasmuch as the LTRO is successful at stabilizing european problems, the marginal bid for treasuries dissipates. Fiscal imbalances noted by BB is another factor that could make people wonder how the US is able to find funding at sub-2% ten yr rates.
–Tens closed just under 2% yesterday at 1.98, a rise of 5 bps. There was a large spike (100k) in TY volume in the wake of Fed’s released comments at 9:00 CST, and rumors of a “fat finger” error. In any event open interest in tens was up only 8300 contracts, while fives were -21k and bonds -18k as March positions are being pared down going into expiration. While US econ data has been better than expected of late, the liquidity fix is the main driver for addicted markets.
–The curve steepened as near eurodollar contracts rallied and backs fell. Red/gold up over 7 bps to 155.5. Implied vol was a bit firmer in treasuries and longer eurodollar contracts.
–Today’s US news includes another round of testimony by Bernanke. Jobless Claims expected 355k. Personal Income and Consumption +0.5 and +0.4 with Core PCE +0.2. ISM expected 54.6 from 54.1.
Feb 27. Liquidity
Increased liquidity is once again the theme for the week, month, etc. At the G20 summit this weekend Germany appears to have softened its resistance to increasing the firewall for Europe. Also, the ECB’s LTRO is Wednesday, with estimates generally around 450 bil euro.
–The other big and related theme is the price of oil, with CLJ2 up $1.80 late Friday to 109.63. Business Insider cites a research report from BarCap claiming the run up in crude is not primarily due to the actions of central banks, but more related to increased Asian demand (“The problem with judging the global pace of oil demand growth is that the epicentre of that growth has most definitely moved away from the US to Asia, and China in particular”), and a production fall off in the mideast related to geopolitical tensions. Whatever the reason, it’s clearly having a negative impact. Dow Jones Transport Index rolled over in the beginning of Feb and has been moving lower ever since. Vehicle miles driven is continuing to fall. I don’t know how much I buy into the “it’s not central banks, it’s Asian demand” story, especially since China appears to be weakening. However, maybe Japan is accounting for more oil usage since their nuclear capabilities have been impaired. In any case, gold and copper are both up similar amounts to oil since the beginning of the year arguing for the liquidity angle. One analyst suggests watching “weekly same store retail sales comparisons. They held up well all last year. If their YoY readings start going under +2%, that will be a danger sign.”
–US rates saw muted volume Friday as rates edged higher. Ten year remains just under 2%.
–Stockton CA may declare bankruptcy this week, 13th largest city in California.
Feb 24. Crude oil surging; CLJ $108/bbl
–Solid 7-yr auction sparked a late bid in longer treasuries. The curve flattened slightly, tens closed under 2% at 1.98. Option expiration today in March treasuries.
–Crude oil continued to surge, with CLJ at $108/bbl late yesterday, up 1.73, the highest level since May 2011. I don’t know if official inflation data will register the increase in cost-of-living, but I think markets may begin to take notice. For example, I marked ten year note to tip spread at 232, the highest since last August. (Back in May/June it was 250ish). In eurodollars there was a seller of 10k each red midcurve April and May 9937p (EDM13 settled 9936) vs buyer of 10k each blue midcurve Apr and May 9837/9812p spds (EDM15 settled 9848). Paid between 0 and 1 bp for the put spreads. Steepener trade, which depends on the front part of the curve remaining stagnant, while market perceptions shift toward an inflationary outlook (and Fed tightening) for the longer end.
–The recent weakening of the yen may also be sending a signal that crushing govt debt loads have consequences. JGBs haven’t really sold off much, but appear vulnerable. Worth noting in this context that US debt to GDP is now at 100%. Also, in the (much) shorter term, there has been a tendency to buy treasuries for weekend safety recently, as the Greek situation was more fluid. That bid is probably over.
Feb 23. US Ten year note gravitates to 2%
–Late in the day Wednesday, April Gold jumped $20 to over 1780/oz, which is a new high for this calendar year and places the high from early November, around $1800, squarely in the crosshairs. Oil also remains strong, with many articles being written about high gasoline prices. No worries though, Nancy Pelosi is on the case: “Independent reports confirm that speculators are driving up the cost of oil, hurting consumers and potentially damaging the economic recovery. Wall Street profiteering, not oil shortages, is the cause of the price spike.” She neglected to mention gold. Or the Fed. Or QE. Huffington Post reports that “Three members of Congress receive threatening letters.” I guess the others must have gotten delayed in the US Postal system.
–The US isn’t the only country with policies that sometimes produce results that politicians couldn’t possibly have foreseen. UK’s Telegraph reports: “The amount of income tax paid fell sharply last month in the first formal indication that the new 50p higher rate is not raising the expected amount of revenue. Senior sources said that the first official figures indicated that there had been “manoeuvring” by well-off Britons to avoid the new higher rate. [There are] …fears it is forcing entrepreneurs to relocate abroad.” Better get Scotland Yard on that mystery.
–France, having more important issues to confront, “…abolished the ‘sexist’ term Mademoiselle from all official documents because it suggests a woman is ‘available’.” [Daily Mail] Just a wild guess, but I’m sure Dominique Strauss-Kahn had a hand in guiding such a sensitive issue.
–Tens in the US closed at the magnetic level of 2%. Today’s news includes Jobless Claims, expected 355k, and 7 year auction.
Feb 22. Treasuries edge to higher yields on Greece agreement
–Fairly uneventful Tuesday given what appears to be an agreement to resolve the Greek debt situation. Yen continues to weaken with EUR/JPY at a new high (80.12). Stocks gave back Monday’s gains (in futures) and closed essentially unchanged from Friday. The big winners were crude oil, still being lifted by mideast tension and central bank liquidity measures, and gold which closed up about $35 from Friday close. Oil closed at its highest level since May of 2011.
–Near eurodollar calendar spreads were able to make new highs with EDZ12/13 at 18.5/19.0 (settled 18.0). The curve was generally steeper, with tens gaining 4 bps to 2.05%. Treasury auctions 5’s today and 7’s tomorrow; the “safety” bid for treasuries eroded at the margin as Greece stumbles toward a temporary reprieve. Eurodollar straddles also fell about 1-1.5 bps as uncertainty eased.
–From Detroit News: “Last year, U.S. drivers logged 35.7 billion fewer miles over 2010 — down 1.2 percent — to 2.963 trillion miles, the Federal Highway Administration reported.”
–The BOE voted 7-2 in favor of a £50 billion increase in easing. China eased restrictions on some home buying rules.
