Aug 12.
Aug 12. Bad 30-year bond auction sent the yield up nearly 1/4% to 3.78% from 3.54. The eurodollar curve was also influenced as red/gold pack spread gained over 7.5 bps, with golds down 6.875bps. While the Fed just pledged to keep rates low through mid-2013, it seems like the market is trying to determine exactly where on the curve it should begin to steepen aggressively. All near one-year calendars are going lower, for example Dec11/12 was down 4 to -8.5. EDH12/13 settled at 1 bp (new low) while EDH13/14 settled 63, so right now the market accepts the Fed’s power to control the next year and a half with regard to short rates. Two year treasury yield was nearly unchanged while tens shot up 19 to 2.33.
–In eurodollar options, EDM13 9950 straddle settled only 53.5. With 1 3/4 years to go, the 9950p are only 28.5 bps! (EDM3 99.465s). I am willing to bet against the Fed on that particular pricing…
–There were a few large exit trades, 20k TYU 130/132 c spreads sold. Both E2Z and E2H 9875/9900/9925 c flies were sold 50k, at 3.5 and 3.0 respectively. All closing positions.
–Stocks rallied hard. France, Spain, Italy are imposing rules against short selling in an effort to save their banks.
–The US Post Office says it needs to cut about 120k jobs to stem its losses, but will need legislative help because of union opposition. Perfect case study…a gov’t service whose original mission has been made nearly obselete by new technologies. Should it be heavily subsidized by taxpayers?
Aug 11. Another day of wild price action (and prices)…
Aug 11. Another day of wild price action (and prices). Many near eurodollar spreads have now gone negative. Even EDZ11/EDZ12 has inverted to -4.5, with Dec’11 99.525 and Dec’12 9957.0. Some people are scratching their heads as EDM2 100c trade 0.5, while euroswiss contracts have blown through the zero bound and trade 100.10 to 100.16. Switzerland now considering a euro peg (that ought to kill it). Flows of money searching for safety have poured into swissy and gold; the latter trading over $1800 yesterday. Financial stocks took another big hit with Citi, BofA, GS and Morg Stanley all down around 10% as rumors swirled about Soc Gen.
–Three month libor settings have been fairly stable in spite of all the turmoil, yet EDU11 99.625 straddle still trades 15/15.5. As back months have rallied, at-the-money straddles have collapsed, and if I marked the settle correctly, E2U 99.375 straddle settled at only 22.5. Greens can move 10 bps any given day, and there’s a month left on Sept midcurves. I think that straddle spread is an absolute MUST DO at 7 (sell front), or just buy green and scalp. Perhaps the Fed can successfully anchor the front end, but greens can whip around like a mad cat’s tail.
–With scared money looking for a home and worried about paper assets of all types, it’s only a matter of time before that money goes back into THINGS, and perhaps the small rebound in crude oil is an omen. I’m sure Bernanke is trying to re-work the “our actions help equity markets and your 401K’s, but in NO WAY contribute to higher commodity prices, which are driven specifically by Brazilians and those other guys that live in the Fiji Islands” speech.
–30 year auction today. Job Claims continue to flirt with 400k, expected 405. Trade deficit expected 48.0B (as Baltic Dry Freight Index scrapes along the bottom). http://www.dryships.com/pages/
Aug 10.
Aug 10. Well the Fed succeeded in convincing the market of low rates for a long time (at least yesterday). Eurodollar calendar spreads were crushed. One year calendars nearly at zero: Sept11/12 settled 2.5 and Dec 11/12 at only 1 bp. The commitment to keep rates low until at least mid-2013 almost seems desperate…through the next presidential election cycle…probably why three members of the FOMC dissented. At Bernanke’s last press conference he said he didn’t know how long “extended period” meant, the Fed wanted to leave it open. Now he knows? Five year treasury yield closed under 1%. What’s the purpose? To save asset markets? If people can’t refinance mortgages currently due to negative equity or spotty income records, is another 50 bps cut in mort rates going to make much difference? Is the forced (domestic) push into risky assets going to spur consumption, or create an uneasy and perhaps misguided confidence? Can the trading partners of the US think this is good? China and Russia already see US dollar policy as reckless…is this move going to mean dollar assets are shunned? I personally think this was bad policy, will shortly lead to a steeper curve, and will NOT underpin asset prices. The message is renewed recession, and inability of monetary policy to affect the outcome positively.
–I have never seen straddle settles like yesterday. EDH2, M2 and U2 9962 straddles are all within 1.5 bps of each other, from 27.5 to 29, but with an added twist of EDH12 at 28.5 closing higher than EDM12 at 27.5. Red/green pack spread at 57 is near last year low of 54. Jackson Hole conference Aug 25 thru 27 ought to have some fireworks….
Aug 9.
Aug 9. A day of huge volatility in many markets Monday, with SP500 down 6.7% and gold up 3.7% to over $1700/oz. Implied vol screamed higher in stocks and treasuries as the flight to safety spurred a treasury rally in spite of S&P’s downgrade of US debt. New low in 2 year yield to 26 bps. Fives, which were as low as 1.03% last November traded to 1.09%, down 15 bps. Tens fell 21 bps to 2.34%, slightly below last October’s low but still well above the crisis low at the end of 2008, which was 2.055. (Treasury auctions 3-yrs today).
–Even AAPL and GOOG were down over 5.5%, while Bank of America was down 20% and Citi nearly 16.5%.
–FOMC meeting and announcement this afternoon. I keep wondering what the Fed can possibly do to soothe investors’ jangled nerves, and I can’t really think of anything. A commitment to keep rates low is now threadbare. The possibility of QE3 could be construed as panic, and QE2, though perhaps marginally beneficial, didn’t meet expectations of providing a solid floor under asset prices. Indeed, Europe’s purchases of Italian and Spanish debt corresponded with crushing new lows in european banking names. Government pledges to saddle taxpayers with unsustainable debt in order to ‘support the market’ aren’t passing the sniff test…driving gold ever higher.
–EDZ1/EDH2 euro$ spread settled negative yesterday at -0.5. That’s sort of a big deal given that short rates are already near zero. One year Dec11/Dec12 calendar spread is only 13 bps. The market is already convinced of low rates for an extended period…going to have to pull something else out of the hat….
Aug 8.
Aug 8. From HuffPost: “The U.S. is “pretty darn f**ked,” [former Obama econ adviser Christina] Romer said during a segment on Real Time with Bill Maher called “How F**ked Are We?”, after Maher asked what the [S&P downgrade] news could mean for the U.S. economy. Perhaps a tongue in cheek comment, but the S&P move is another crack in fragile markets. More importantly, news over the weekend in Der Spiegel that the German gov’t considers Italy too big for the EFSF to save should simply send european banks into a tailspin. US banks are also sliding, with Bank of America the current postal child, having lost about 20% of its value in August, (due to continued mortgage regulatory woes).
–The downgrade itself probably isn’t that important, as both Moody’s and Fitch had already re-affirmed the US AAA rating. No portfolios are likely to be FORCED to sell treasuries. However, there is a risk that rating downgrades of european nations could ensue.
–Employment data from Friday is already a distant memory as financial market strains threaten to overwhelm market confidence.
–For the first time in eurodollar futures, and Fed Funds, there was sizable buying of 100 calls. Notably, 100k EDM2 100c for 0.25 and 0.5. FFU1 100c trade 0.25 in 1k. FFZ1 100c trade 0.25 in 5k. Risk AVERSION.
–Other disconcerting items: (HuffPost) The Postal Service said Friday it lost $3.1 billion in the April through June period and could be forced to default on payments due to the federal government when the fiscal year ends in September. Also, food stamp use in the US rises to record 45.8 million. And riots in North London are a reminder that economic fragility can break down into social instability.
Aug 5. Severe risk-off meltdown yesterday…
Aug 5. Severe risk-off meltdown yesterday. Stocks, treasury yields, and emerging markets all plunged. 2yr note made a new low yield of only 27 bps. Tens dropped below 2.5% to end 2.47, down 13 bps on the day. SPX was down nearly 5%, while Nasdaq fell just over 5%. Gold was at new contract high in the morning, but had an outside key reversal and closed lower. Crude Oil sank below $90/bbl…at one point CLV was down 5.50. One month T-bill rates edged negative, and BONY announced a fee on large deposits of 13 bps, a charge on safe haven flows. New lows DB, UBS, RBS, BAC…things aren’t good in the financial sphere.
–Confidence in the world’s consuming engine (that would be the US) is waning. We already know from Walmart that low income shoppers are stretched extremely tight, and now if stock market losses shake the confidence of upper income consumers then it’s game over. Add a run on Italy banks, stir in a plunge of over 6% in Brazil. Could be like late 2008 when consumption stopped…a Kevorkian cocktail.
–Employment today. I saw a quote on BBG that this number was “crucial”. Look…we all know that gains in NFP aren’t large enough to pull down the rate unless discouraged workers drop out of the work force. This number, while it could spark a bounce, isn’t ‘crucial”.
–From FT: “‘Crisis is over’ as AIG posts profit…Benmosche says insurer could handle severe downturn.” Well sir, you might get your chance…
Aug 4.
Aug 4. Like other recent data, non-mfg ISM was weaker than expected yesterday at 52.7. In a fairly quiet session the curve flattened with 2/10 in about 4 bps to 227, and red/gold pack spread down 2.5 to 248. New low as well in red/green to 64.5. There was late selling of green midcurve straddles, E2Z 9875^ had settled 54 on Tuesday, 51 yest. (Also a seller of about 30k E2Z 9862c, exit). E2H 9850^ went from 74 down to 70s. There was a buyer of 20k USU 136/138c spd for 15. Approximate 7 bps per bond future point derives a yield a bit over 3.5% for the 136 strike; cash yield ended yesterday at 3.87%. The flatness of the curve at these low rates suggests possible recession, and of course there was renewed discussion of QE. JPM cut Q3 growth forecast to only 1.5%. If the purpose of QE is to lower rates, and the risk is uneasiness over Fed monetization of debt, what’s the use with five year treasury rates already at 1 1/4% and 30 year bonds well below 4%? The real goal of the Fed is to support assets, i.e. stocks…so might as well go straight into the SP futures. Of course, the hoped for transmission effect is that higher stock wealth generates increased consumption, and as we’ve seen recently, that medicine has lost its effectiveness.
–Intervention by BOJ caused yen to plummet overnight (JYU future -500 to 125.11). BOJ and SNB are bravely fighting against safe haven flows, while gold welcomes them. Continued radiation problems at Fukishima would seem to be a factor in favor of yen weakness, but it hasn’t worked that way so far.
–Job Claims expected 403k.
Aug 3.
Aug 3. Treasury yields were again crushed with tens down 11 bps to 2.63% and fives down 8 to only 1.23%. Euro$ calendars all made new lows as well, with EDZ11/EDZ12 at only 15.5 bps, down 6.5 on the day. Red/green pack spread 65.5 bps. The lowest level of last year (on rolling basis) was 54, in late October. The market is pricing in more QE without the Fed even hinting at it yet. EDH/EDM at only 1.5 on settle.
–Gold exploded to record high nearing $1650. Corn also soared to limit (CZ above 7.15 and threatening record high), while stocks plunged with SP500 down 2.6%. Moody’s retained US AAA rating but put on negative watch, (inviting a criminal investigation into rating agency roles in the subprime crisis?) –The dynamics of an overleveraged world resting on a foundation of loans/assets which require a steady cash flow for servicing are exposing the limits of central bank policy. Both Europe and the US need GROWTH to ensure cash flows…rates near zero (or, in Swiss case, today at zero as SNB cut to stem the rise in currency) aren’t spurring growth. Italy yields are rising to Spain levels as spreads vs Germany rise. Italian banks continue to see share trading halted because of worries over holdings of sovereign debt. Keynesian AND monetary policies both fail. In the short term, lower govt spending will lessen GDP, but if Washington could confront longer term structural issues, confidence would return to the private sector and unleash cash on the sidelines. But that effort failed as well, with resulting loss of confidence evident in stocks…
–Today includes ADP, Factory Orders expected -1.0 and Service ISM expected 53.0 same as last.
Aug 2. New lows in all euro$ calendar 1-yr spreads…
Aug 2. New lows in all euro$ calendar 1-yr spreads. The lowest, EDZ11/12 is a mere 22 bps. The unexpected drop in ISM to only 50.9 underscores economic weakness, and deterioration in Italy, Spain spreads could portend dollar funding issues. And of course now that the debt ceiling has passed the house, I’d guess cash mgmt bills will be issued pronto, causing further flattening pressure.
–Red/green pack spread fell about 4 bps to 70.5. Citi noted that 2/5 treasury spread has broken to new lows, 95 bps…”the curve reflects increasing concerns with the U.S. economy/slowdown.” BBG estimtes light vehicle sales due today may be only 11.8 million vs 12.5 in first half.
–Today’s news also includes Personal Income and Spending expected +0.2 and +0.1 respectively.
–There is still buying in deferred midcurve call structures. Fimat rolled from E2U to E2H butterflies and a buyer in blue midcurve calls was also in…the flattener trade is being expressed in every way possible, and I would say that pricing at these levels reflects not just a slowdown, but more of a disaster scenario which I find difficult to fathom. This move isn’t QE inspired like late summer last year (or maybe it is…) when SP500 was 1100, and EDZ11/12 was 50-55. This is pure economic malaise, and maybe stocks are even starting to grasp that possibility. Financial turmoil in europe and slowing in China doesn’t help..
Aug 1.
Aug 1. Stunning rally in fixed income Friday with both 5-yr and 10-yr notes falling about 15 bps to recent lows after much weaker than expected Q2 GDP report. 5-yr yield 1.37 and 10-yr to 2.80%. Eurodollar calendar spreads absolutely collapsed to new lows. For example EDH12/EDH13 closed at only 29.5 bps. In my opinion, these spreads are entirely too low, pricing in complete economic disaster. EDH2/EDM2 settled at only 3.5; I am a buyer. The rally was perhaps more about weak growth than about debt ceiling or european problems. In fact as of this writing Sunday evening, it appears there is a debt ceiling deal, but fixed income has barely sold off in spite of a solid bounce in equities.
–Forecasts by the Fed and other private economists were for growth of around 3.5 to 4% in 2011. Now it looks like like there is simply no chance of that, even if some of the factors restraining output were transitory. Furthermore, if the Fed is so completely far off on its forecasts, how can we really be sure monetary policy is anywhere close to the right trajectory?
–Employment cost index surges +0.7 in Q2 due to benefits. (Reuters) “Benefits costs, which make up about 30 percent of compensation, grew 1.3 percent in the quarter, the biggest gain since June 2007. Wages and salaries expanded by 0.4 percent in the second quarter after increasing by the same amount in the first quarter.” The only place you can spend benefits is on health care… But wage growth of only 0.4% is not the answer to robust consumption in an economy where deleveraging is still the dominant force.
