Jan 31. Fed’s Sr Loan Officer Survey positive… for US domestic banks
–The eurodollar curve continued its flattening trend, with red/green pack spd near record low (in the zero rate FF era) of 27.5 bps. Red/blue pack spread fell 2 bps to just over 88.
–The Fed’s Senior Loan Officer Survey was released yesterday, notable for the difference in responses between domestic (US) banks and foreign institutions. Domestic banks were generally positive, noting increased business, slightly easier standards, and firming loan demand in C&I lending. “Foreign respondents that reported having tightened their standards or terms on C&I loans unanimously cited a less favorable or more uncertain economic outlook, and 80 percent cited a deterioration in their current or expected liquidity position.”
–The open question is whether the US substantially sidesteps european problems; the survey appears fairly positive on that possibility, though the absolute level of US interest rates are still indicative of economic stagnation.
–I wasn’t in yesterday to see the flows, but volume in blue euro$ midcurve calls are easily the standout feature (now a regular occurrence) with 188k Blue March and 307k Blue June calls trading. However, open interest in blue june calls was down 68k.
–Today’s news includes Employment Cost Index expected +0.4%. Chicago PMI 63.0 (continued strength), and Consumer Confidence which was 64.5 last and is being forecast at 68.0, (too high).
Jan 25. FOMC releases projections. Yen falling…
–Light volume trade Tuesday…interest rate markets took a breather from recent trends…wait and see for FOMC. The curve edged slightly flatter. Vol was lower.
–Doesn’t appear to have been much reaction to State of the Union address. Stocks are down a bit this morning (in spite of AAPL’s blow-out quarter) due to european malaise.
–Perhaps one of the most notable moves in the last couple of days has been the fall in the yen. USD/JPY up at 7820, EUR/JPY at 10147 which touched a low around 9700 just last week. I don’t know if it’s a precursor for “risk-off” trade, but bears watching.
–In eurodollars there continues to be buying of calls in green and blue midcurves in spite of the curve having steepened the past few sessions. There is also a consistent buyer of EDM2 9925p vs 0EM 9912p, which is a conditional flattener on EDM12/EDM13, now trading about 8.5. Yesterday the option spread was done for flat. If a true funding crunch occurs due to europe spiralling out of control, then EDM2 would likely decline and M12/M13 would conceivably invert…perhaps not a bad trade in that event. I myself am long EDJ 9900p for the same reason (1.25s).
–Today brings FOMC Summary of Econ Projections, predictions, guesses…. Also 5 year note auction.
Jan 24. Treasury yields creeping higher
In a continuation of recent trend, yields increased and the curve steepened. Ten year gained 4 bps to 2.07%. 2/10 treasury spread also up 4 to a new high of 183. Red/gold pack spread up over 5.5 to 185. New recent highs in some one year euro$ calendar spreads as well, for example EDZ12/EDZ13 settled 16.5. (Still very low for a forward one year, indicative of Fed on hold). Previous month range in this spread has only been 9 to 15.5.
–Feb treasury options expire Friday. Treasury vol was significantly higher first thing Monday morning, but faded after its initial surge, though still ended a bit higher on the day. TYH 130 straddle traded as high as 163 in morning but closed 153. USH 141 straddle traded 435, closed 422.
–The steeper curve and higher vol both suggest that the trend in yields is higher, though significant deterioration in europe could easily derail the move. IMF’s Lagarde is warning that more firepower is needed to contain the crisis. News this morning centers on Portugal and a surge in its CDS.
–Treasury auction of 2 year notes today. Obama State of the Union tonight.
Jan 23. US Ten year back above 2% as further QE questioned
Jan 21. Ten year note finally edged back above 2% at 2.03 on Friday, up 6 bps on the day. The curve steepened, most notably further back. For example, red/gold euro$ pack spread made a new high at 176 bps (+5.25), but red/green was only up 1 (to 39). New high in 2/10 treasury spread to 179. The catalyst for the move was a WSJ article suggesting that plans for QE3 were being tabled for the short term.
–The Fed will release its Summary of Economic Projections Wednesday, with information on interest rates, inflation, size of the Fed’s balance sheet. Given uncertainties in Europe, China, and the oil wild card of the Mideast, such projections can only be considered rough guideposts to current thinking; subject to change rapidly. Recall that last year the ECB hiked rates, an indication of just how wrong a central bank can be.
–From a recent Roubini paper: “Indeed, in recent private conversations, senior White House and Treasury officials have expressed serious concern about a scenario in which the euro falls by another 20-30% relative to the dollar.” Why? Because export competitiveness of the US will be compromised.
–There is a fascinating piece on Zero Hedge about the Greek bond situation.
Link below but I will attempt to summarize. Most Greek bonds were issued under Greek law, but, according to the article, 25-40 billion euro were issued under UK law with Collective Action Clauses [out of about 350 billion]. These clauses allow a cramdown of new terms to all bondholders as long as 2/3 of holders agree. According to the article, hedge funds have been trying to accumulate a stake of 34% or more of these bonds, which will make a cram down favorable to Greece unlikely…and if Greece chooses to change the terms of the bonds issued under ITS laws, it will lead to classes of subordination in all sovereign bond markets, causing further funding problems for all sovereigns. The upshot is that a relatively small bloc position in the Greek bond market might have overwhelming sway in the outcome, which of course will have ramifications for Portugal, Ireland, etc.
http://www.zerohedge.com/news/subordination-101-walkthru-sovereign-bond-markets-post-greek-default-world
Collective action clauses (CACs) are a new element in the international financial architecture which is to ensure orderly and timely resolution of sovereign default. This feature is expected to contribute to the more orderly resolution of sovereign debt crises by preventing unwarranted creditor holdouts.
Jan 20. US curve steeper as long end yields rise
–Interest rate futures came under selling pressure as Jobless Claims plunged to 352k and fears over europe ebbed. Ten year note jumped 8 bps to 1.97%. 2/10 treasury spread closed at its recent high of 174 and red/gold euro$ pack spread was up nearly 9.5 at new recent (monthly) high of 170.5.
–As we approach the FOMC (where the Fed will likely forecast ten year rates at 1.9% forever), the market sent a reminder that the long end isn’t always easy to control. This morning’s WSJ has this quote, “Federal Reserve officials are waiting to see how the economy performs before deciding whether to launch another bond-buying program.” In other words…waiting for spring before announcing…
–Treasury vol jumped, but mostly because we shifted to lower strikes.
–According to BBG, China PMI still reflecting soft conditions. “The preliminary January reading of 48.8 for the gauge, released by HSBC Holdings Plc and Markit Economics today, compares with a final 48.7 number for December.” Shanghai Composite has been in a defined downtrend since summer, now trying to bottom, either in spite of weaker econ data or because monetary easing might result… Hang Seng appears to have bottomed already, trying for an upside breakout.
–Existing Home Sales today in the US.
–Google dropped 10% after yesterday’s earnings release but overall stocks held near highs. Interesting note on ZH from TrimTabs: “…a large number of indicators suggest institutional investors are more optimistic than at any time since the ‘waterfall’ decline in the summer of 2011.”
Jan 16. Europe downgrades spur buying of US treasuries
–US yields simply continue to plunge, with ten year notes down 7 bps to 1.86%, as european countries were downgraded by S&P (France and Austria lose AAA ratings). Greek debt negotiations have broken down. And from ZH citing FT article: “Ms Merkel said she would consider calls from her party colleagues for legislation to bar institutional investors such as insurance companies from selling bonds when ratings were downgraded, or fell below investment grade.” If that’s not an engraved invitation to rush for the safety of US treasuries I don’t know what is…
–The curve flattened. Red/gold pack spread fell nearly 7 bps to 161.25. 2/10 at 164, down 6.
–At the Jan FOMC (one week from Wed) the Fed announces its first interest rate forecasts. Then there’s a meeting in mid-March. There is some speculation the Fed will announce another round of QE (buying mortgage securities) at the April meeting, as there is a press conference then, and twist operations end in June.
–Stocks fought back from early losses to close only modestly lower, as the relative safety of US equities and the prospect of more liquidity measures underpins support. (In a way, the decoupling of dollar strength/equity weakness indicates safe haven flight to US stocks, rather than the idea of robust economic performance).
From Prudent Bear: “After nervously following the euro tick for tick late in 2011, the marketplace has adopted a view that euro weakness is no longer something to fear. Indeed, the new analytical regime holds that a weaker euro is a welcomed consequence of the ECB having taken the type of decisive action required to finally resolve the European debt crisis. The ECB’s massive ($620bn) Long-Term Refinancing Operation (LTRO) has for now effectively contained the forces of crisis contagion. A weak euro is indicative of liquidity abundance supportive of European sovereign debt, the banking system and global risk markets more generally, at least according to the bullish perspective.”
–Baltic freight indices all continue to trend lower (see charts http://www.dryships.com/pages/report.asp ). In a world where every country hopes to export its way to stability, it’s not a good sign for world trade.
Jan 12. US yields continue to fall…
–Huge call buying yesterday in euro$’s including 80k EDM2 9950/9962 c spreads for 4. (volume actually 123k and 150k, open int up 62k and 48k). EDM settled yest at 9944…now 48 bid. There was also call spread buying in greens and blues, for example 2EH 9912/9925c spread and 15k of 3EU 9862/9887cs. Open interest in Green March calls +75k. The point is that there is massive new buying, and of course eurodollars are higher this morning as Spain successfully sold debt and european stocks rally. The LIBOR setting was a bit lower yesterday, (just above 57 bps) and now appears as if it might grind down by a fraction of a bp every day, just as it did on the way up. So now EDH2 is trading 9951 or 49 bps, about 8 lower than than libor setting.
–Ten year yield fell to only 190 (down 7 bps) in spite of ten year auction and firm stocks. 30-yr bonds auctioned today (yield ended yesterday below 3% at 2.96).
–Natural gas plunged to new low yesterday, continuing a strong trend. In the past two months the front contract is down 1/3rd (from 410 to 275).
–Today’s news includes Jobless Claims expected +375k and Retail Sales expected +0.3 to +0.4. However, given the blow-out increase in Consumer Credit in November, I think there is a risk retail sales surprise to upside. [Actually came out weaker than expected at only +0.1%]
Jan 9. Consumer credit surges $20 billion, but near term yields still fall….
–Jan/Feb dollar spread and Jan/March are now inverted! (prices 9943, 9944.5, 9944). Near euro$ contracts up 3.5-4.5 bps. Consumer Credit +20 billion…huge number. Three year auction today.
–(Reuters)-China trade growth slows to 2-year lows in December. And from Bloomberg cited on ZH, “China’s stocks regulator will “actively” push pension and housing funds to begin investing in capital markets, and encourage long-term investors such as insurers and corporate pension plans to buy more shares.” Emerging markets were crushed last year. Shanghai Comp is having a nice bounce (for whatever reason); might be worth buying emerging markets as contrary play.
–Just a couple of thoughts about the Nov surge in Consumer Credit. I saw an article proclaim that the age of household deleveraging is over because yoy growth in consumer credit is now back up to zero. And the Fed’s FOR (Financial Obligation Ratio) for households is near the lowest ratio since 1980 at 16.15%, from as high as 18.85% in ’07 (positive for consumption).* However, the last Flow of Funds report shows that household mortgage growth is still negative though improving (-1.8% in Q3) and in absolute levels mortgage debt is $9.875T vs $2.476T in cons credit (4x greater). Perhaps, if mortgage debt growth stabilizes, one might conclude that the US consumer is back! However, the St Louis Fed put out a paper which notes that Consumption as a % of GDP is still near record high around 71.1%. In the decade from 2000-10 this ratio was 70% (think of consumption spurred by Mortgage Equity loans). The previous decade was 67.3% and in the 80’s it was 64.5%. I have a hard time believing this ratio can continue higher… and we are in a period where govt as % of GDP should begin to slow. The paper concludes that growth is likely to remain sluggish.
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* FOR and DSR (debt service ratio) is a measure of the ratios of debt payments to disp personal income. FOR adds auto leases, rents, and property taxes. DSR is 11.09% and FOR 16.15%…low.
http://www.businessinsider.com/the-age-of-consumer-deleveraging-is-over-2012-1
http://www.stlouisfed.org/publications/pub_assets/pdf/re/2012/a/Consumer_Spending.pdf (very good 4 page piece from St Louis Fed)
http://www.federalreserve.gov/releases/housedebt/default.htm
Jan 9.
–Employment report was stronger than expected (NFP 200k and rate of 8.5%) but yields ended the day lower, with tens down 3 bps to 1.96%. Key support of the bond market due to safe haven flows from europe and worries about mideast tensions. Potential QE is also a factor, though far from certain:
(Reuters) – Signs the U.S. recovery is gaining strength suggest the Federal Reserve may not need to buy any more bonds to spur growth, a top policymaker [St Louis Fed’s Bullard] said on Saturday…”I don’t think it’s very likely right now because the tone of the data has been pretty strong” through the end of 2011 and up to now…
–The US is facing its own Greece…(UPI) — Moody’s Investors Service said it reduced the credit rating for Illinois from A1 to A2, citing troubles with its pension plan….Moody’s noted Illinois, although it raised state income tax rates and business tax rates last year by 67 percent and 30 percent, respectively, took no steps to correct problems with its pension plan, the Financial Times reported Saturday.
–The difference is that the US Federal gov’t can unilaterally take steps to bail out Illinois.
–Treasury auctions 3’s, 10’s and 30-yr bonds this week. Fed speakers almost every day this week.
Jan 4, 2012.
–Risk assets were embraced for the start of the new year with US stocks up ~1.6%. (Sort of like the Chicago Bears coach proclaiming the team is 1-0 in 2012). Ten year yield rose about 8 bps to 1.96%…still sub 2% going into employment data. Curve was steeper with red/gold euro$ pack spread up 5.5 bps. ISM was stronger than expected at 53.9.
–Option trade was mostly bearish regarding rates. E2F 9900p (green Jan, expires one week from Friday) traded 3-3.5 about 16k, new buyer. Also a new buyer of 13k E2U 9825/9775p spd for 5.5.
–The Fed announced plans for greater transparency and rate forecasts. (Reuters) “…it could offer the economy a bit more of a lift by better aligning financial market bets with the main view at the central bank.” Really? The Fed’s forecasts for the economy in 2011 were off the mark and revised lower. The ECB erroneously raised rates as late as July. I don’t know if Central Bank guidance is that valuable over the longer term. Rates are very low, the curve is quite flat. I would just go with the market forecast of the economy and rates (sluggish). In the days of Greenspan market signals were cited as clues about economic perceptions…e.g. forward 5 year rates, tips vs treasuries. Now the Fed wants to guide those views and perceptions. The trend of increased gov’t activism isn’t addressing the over arching problem of too much debt.
–While commodities and metals were strong, crude oil was a star performer…up about 4% on the day with CLH 103.25 late, up 4.25, spurred by mideast tensions. Cheaper gas prices have underpinned stronger than expected US data; a prolonged rise in crude would be quite negative.
