June 29. Ten year yield jumped back above 3% to 3.04…
June 29. Ten year yield jumped back above 3% to 3.04 as the five yr auction was disappointing. Green eurodollars were down over 17 bps on the day. Calendar spreads rebounded strongly from their lows.For example, March’12/March’13 was up 13 bps to 68. Treasury auctions 7 yr notes today.
–Stocks continued to rise in front of today’s Greek austerity vote. However, financials were weak, with Goldman and JPM actually making new lows for the move. BofA, with market cap of around $106 bln, is to pay $8.5 bln in a settlement on mortgage securities, according to WSJ. In any case, markets have generally shrugged off concerns about Greece for the short term.
–Treasury vol rose on the sell off, with TYU atm straddle jumping to 303 from around 257 at the start of the day. Market sentiment appears to have shifted to reflect fears of higher rates at the long end of the US curve, perhaps exacerbated by quarter end and the US holiday weekend.
June 28. Dallas Fed Mfg survey adds to a list of weaker than expected econ data
June 28. Dallas Fed Mfg survey adds to a list of weaker than expected econ data, expected -3.2 actual was -17.5. The question is whether this slowdown is transitory or not. ISM is out this Friday, had a large drop last time to 53.5 and is expected lower…dangerously close to 50?
–Yesterday saw a reversal in several markets, notably in stocks, which staged a powerful rally. Treasury yields rose as the 2 year note was auctioned, 5’s today and 7’s tomorrow. Seller of at least 25k TYQ 126/127 call spread at 13, exit of trade. Weakness is evident in long end of curve, where 30 year bond yield jumped 11 bps to 4.28%.
–Large buying of EDU 9962c helping push EDU1 up 2 bps to 99.585. Front end weakness has abated for now.
–News today includes Consumer Confidence expected 62 from 60.8.
June 27.
June 27. As June draws to a close it seems like the firewall has been jumped and now Italy is under attack (banks downgraded). It’s a rolling crisis of confidence. Two year US treasury is near new low at 33 bps. Five year dropped 8 to 1.38. However the US bond yield was unchanged…the long end is balking at diving to shallow rates, especially without overt sponsorship of the Fed.
–Once again eurodollar calendar spreads made new lows, with Sept/Sept barely above 1/4% at only 28.5. As mentioned previously, open interest continues to drop in near contracts. Total ED open interest fell 75k. EDU1 was up 8500, but the next 4 were -20k, -38k, -33k and -17k. When in doubt, get out?
–Today’s news includes 2 year auction, Pers Income/Spending +0.4/0.0.
–I saw an article that Greece was unable to pay past due bills, that some bills related to medical care were being left unpaid for 2 years. In Illinois, the Governor recently floated new bonds in order to pay past due bills. Huffington Post ran a piece with this headline: Chicago Taxpayers Owe $63,525 Per Household In Local Government Debt …”The average debt per household in Chicago is over $63,000, based on municipal shortfalls and underfunded pension obligations. In the suburbs, the average is just under $33,000.” Median household income in Chgo according to 2010 census is $38625. We scoff at problems in Greece.
June 24.
June 24. The day began with big drops in risk assets- stocks, gold and oil all opened with heavy losses. In an already weak market news was (officially) released that strategic oil reserves would be tapped to cool energy prices. Crude oil ended down around $3.60 to below 92. Gold fell $30. However stocks were able to fight back from deep losses and close only modestly lower as an austerity agreeement between Greece and the EU was disclosed late in the trading day causing a price surge. From Angela Merkel: “This is an important decision that says once again we will do everything to stabilize the euro overall.” ‘Once again’, and again, and again…until it just stops working. Ironic that Greece is able to forge an agreement on budget cuts, while talks in the US regarding a debt ceiling increase again broke down. Maybe some street rioting will help move things along.
–New lows in many eurodollar calendar spreads. Dec/Mar settled at only 4.5. March/March is barely above 1/2% at 56. Ten year yield dropped to 2.91%.
–Chicago Fed’s National Activity Index was weak… second month in a row of negative reading and previous month revised lower from -0.45 to -0.56, while May was -0.37. The three month moving average is now -0.19.
–Today includes final Q1 GDP at 1.9% and Durables expected +1.0%.
June 23, 2011
June 23, 2011. Not much market movement in interest rate futures given the FOMC announcement and Bernanke’s press conference, but stocks slid in the last hour to close at the low of the day. Though Bernanke gave no hint of extending QE, ten year notes seem comfortable hanging out in the 2.90’s, like guests that won’t leave. (Closed 2.99%) There are many reasons to be bearish treasuries, including the end of QE, inflationary pressures, lack of sponsorship by China, Russia, Pimco… yet they don’t seem to go down.
–News today includes Jobless Claims expected 415k (holding stubbornly above 400). Chicago Fed Nat’l Activity, which is foreshadowing lower growth. It was -0.45 last (negative values indicate below avg growth), and the three month moving avg also turned negative again to -0.12. Finally New Home Sales expected 305k. More home sales are now cash transactions, a reflection of tighter lending standards which Bernanke cited as a reason for sluggishness.
–July option expiration for Treasuries is tomorrow. TYN at money straddle started the week at around 1 point, closed yesterday at 36/64. Big trade yesterday was CSFB buying 60k EDH2 9875/9900ps for 2.0. Adding to position…open int up 65k in 9875p to 215k and 62k in 9900p to 313k.
June 22. FOMC announcement today.
June 22. FOMC announcement today. The market traded yesterday as if Greece’s gov’t would survive the vote of confidence which it indeed did. However there is another parliamentary vote next Tuesday on details of increasing austerity measures which will also be important with respect to fund disbursements from the IMF and EU.
–The previous FOMC meeting and initial press conference was in late April. In the first paragraph of the statement the committee noted high energy prices but said that inflation and inflation expectations were low. Crude oil is down about $20 in the ensuing time frame. The employment picture has actually deteriorated. Though the Fed is ending QE2 this month, the statement leaves a little wiggle room, in that the Committee is prepared to adjust holdings as necessary. In sum, this meeting is likely to be dovish.
June 20.
June 20. Fairly uneventful day yesterday, though EDZ1/EDH2 made a new low of only 5 bps. CSFB was a huge buyer of 40k EDH2 9875/9900p spd for 2 and 2.5, adding to position, now long at least 70k.
–In the US, Existing Home Sales today and FOMC meeting starts with result tomorrow. Bigger news will be Greek vote of confidence on Papandreou’s gov’t.
–I just happened across this line: “Solon [Athens, 594 B.C.] called his plan “seisachtheia”, literally “shaking off burdens” which sounds curiously like some much more recent political slogans. And the means he adopted for putting seisachtheia into effect have likewise a familiar sound, He reduced the value of the currency and cancelled agrarian debts.” This is from a book from 1954, The Art of Contrary Thinking. I looked up “seisachtheia” on Wikipedia which gives a fuller description adding, “It forbade the use of personal freedom as collateral in all future debts.” Are we not looking at the same phenomenon 2600 years later? (I’m sure someone has seen a reference to this word as it relates to current european problems. But I personally hadn’t seen it at all).
http://en.wikipedia.org/wiki/
–Just a note about declining open interest in first four ED contracts at CME…at least some part of that could be due to migration to NYSE-Liffe which has OI of about 200k total in first 4… –AAPL with $300B market cap had a technical breakdown, made new low for this calendar year. LNKD which had traded over 120 at IPO, closed at 63.71. So much for tech IPO’s as a sign of market strength.
–Zero Hedge has a note about a surge in overnight SHIBOR. Worth watching as another warning about further slowing in China.
June 18?–There was pre-weekend jockeying on Friday given the fluid situation in Greece.
June 18?–There was pre-weekend jockeying on Friday given the fluid situation in Greece. Pressures seen on Thursday abated to a small degree…near euro$ contracts were up 2.5-3.5 bps as was the ten year yield. Once again open interest fell in each of the first four eurodollar contracts, with EDU and EDZ both down about 38k, EDH2 down nearly 5k, and EDM2 -29k. One might think that open interest would be RISING here; that near euro$ contracts would be freshly shorted as a bonafide hedge against funding pressures. The conclusion I draw is that most hedge funds/banks simply have used the contract as a (speculative?) trading vehicle to roll up the curve. The exit of positions reflects a re-evaluation of whether that strategy remains valid.
–FOMC result on Wednesday (two day meeting begins Tues). There is also housing data, but a lack of fresh US economic figures this week.
–WSJ: Russia to continue paring back holdings of US debt. The answer to the question “Who will actually buy US debt?” appears to have an ever shorter list of candidates given that China, Japan, the Federal Reserve, and now Russia are now simply whistling past the treasury storefront, averting their gaze, with hands deeply shoved in pockets. For now, the demand for safety against a backdrop of an increasingly unstable world financial architecture keeps US rates low. And the Fed will step back in when those buyers are sated.
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I was starting write a long rant, instead of the short clip above. So I am including some of those thoughts here, if only because it helps me organize my own viewpoint. The financial crisis has never really ended, seems to me it’s like a chimp that swings through the jungle catching one vine after another, gaining speed on the downswing, losing a bit of velocity on the upward arc before spying another vine to grab. The problems remain, and are inter-related. There is too much debt/overhead relative to productive income/assets. When Bernanke implores Congress to handle long term structural problems, it is an overt admission that central banks can’t “fix” everything. From Prudent Bear: Aggressive “activist” policymaking has been at the heart of this unprecedented Credit inflation, and the markets today fully expect policymakers to ensure this Bubble’s perpetuation.
But policy makers are inevitably losing the confidence of the markets. The ultimate timing is the main question.
I worked at Refco and was there for the implosion shortly after the IPO. Refco closed in late 2005, because there was an asset on the balance sheet that had no value. Supposedly a group of bad debts related to customer blow-ups were re-labeled as an asset. According to Wikipedia and word of mouth from ex-employees, part of this asset was from trading losses of hedge fund manager Victor Niederhoffer in Oct 1997. http://en.wikipedia.org/wiki/
It seems that the entire world banking system is riddled with holes in the collective balance sheet. But these days no one seems to go to jail. The valueless assets are simply bounced around. They are still called assets. You know and I know that someone’s holding a lot of worthless crap. Right now the crap du jour is Greek debt and CDS. I don’t understand the size of the problem. I’ve seen a couple of articles saying it’s all manageable. A friend of mine sent me an email from a knowledgeable investor saying that much of the debt and CDS is ‘hedged’ and that US CDS exposure is irrelevant. Ok, so maybe a particular institution is short Greek CDS and long Ireland. Hedged? Maybe. But what I think I learned from subprime is that someone has a leveraged position on dubious assets. As George Bailey said to Mr Potter, “It means bankruptcy and scandal and prison! That’s what it means!” And when these stories come out, it spills into the real economy and erodes the confidence in economic agents that actually transact business in goods.
The solution has been to keep relaxing rules….mark to market, capital requirements, mortgage down payments through the FHA. It’s going to end. When Long Term Capital Mgmt failed in 1998, the bailout was less than $4 billion and total losses were $5-10 billion. Quaint. But it wasn’t that long ago…and at the time it brought the financial system to the edge of the abyss.
Where Obama completely blew it was in not trying to limit size of the financial sector. He wrongly kept Geithner and Summers, who I am sure, convinced him that financial mkts and bondholders are the key to the economy…if you don’t ‘save’ them the whole thing goes. But they needed to wipe out some shareholders, not allow bonuses, perhaps temporarily nationalize some financial firms. Then what would happen? The smart guys leave and start PRIVATE funds…and THEN you see if there’s truly capital out there or not. The public financial firms would operate with a lot less risk. Like Meredith Whitney says, there are going to be adjustments everywhere. Contracts between local govt’s and their employees are going to be broken. Same thing with bondholders and debtors. And the ordinary Joe that never quite had a handle on it gets mad. At someone.
Finally, coming back to the eurodollar futures market, I can’t seem to grasp the importance of the three month LIBOR setting. It reminds me of the little Johnny joke where Johnny is sent home early from school. His father asks him why. Johnny says it was because of a math problem. The father asks what the question was. Johnny says “the teacher asked ‘what’s two times five?’ ” Johnny says ”ten”. Then she asked “what’s five times two?” And the father says to Johnny, “What the f*ck’s the difference?” Johnny exclaims, “That’s what I said!” Does it really make any difference whether the LIBOR setting is 0.19% or 0.25% or 0.75% and that maybe JPM and DB transact at that rate? It makes a LOT of difference to the people with 1.2 million open interest in EDU1. But maybe the recent loss in open interest of the near contracts represents concern about the meaning of the contract itself.
June 17. The story related to Greece still dominates…
June 17. The story related to Greece still dominates; a default could seriously impair bank capital and create cascading insolvency. The curve is getting whipsawed as safe haven buyers reach for treasuries and deferred euro$ contracts, while the very front end is selling off to reflect a funding risk premium. Eurodollar one year calendar spreads again made new lows. EDZ1/Z2 (dec/dec) fell 2 to only 45.5 bps. On the last day of May it was 71. EDU1 fell 4.5 bps to 99.57, even though the LIBOR setting barely budged. EDU1 now 18 bps cheap to where EDM1 just expired, but I am not at all convinced that the capitulation in the front end is over, notwithstanding this morning’s small rally. Interestingly, EDU1 saw the heaviest volume of any euro$ contract yesterday at 756k. Open interest fell 15k in U1, but first four contracts fell 105k in total open interest, with EDH2 falling 57k. There was a large screen buyer of EDZ1/H2 spread mostly 6, (settled 5.5), must have been an exit. Red/gold pack spread -7 to 272. Ten year yield fell to 2.91%.
–At the end of the day there was a seller of 50k EDZ1 9900/9925p spread at 3.0, also an exit as open interest fell 19k in 92p and 11k in 90p.
–Treasury vol made new highs. TYU atm straddle settled 3-13 (7.4 vol), versus a week ago at 2-50. Buyer of 10k each TYU 119p and 120p.
–Today’s news includes Leading Econ Indicators expected +0.2 from -0.3
June 16. Stocks tumbled as turmoil and riots related to Greek debt talks overwhelmed other factors.
June 16. Stocks tumbled as turmoil and riots related to Greek debt talks overwhelmed other factors. Econ data in the US continues to disappoint, with Empire State expected 12, actual -7.79 and Industrial Production and Capacity slightly weaker than expected. Home builder confidence fell. The euro sank (down 280 late), dollar strengthened. August Crude oil was down 426 late in the day to 95.60, lowest level since February. Front end eurodollars reflected concerns about banking problems and a possible cash crunch, with Barclays warning of problems. There was a LARGE amount of front end put and put spread buying. EDU1 settled DOWN 5.5 on the day at 9961.5, while EDU2 was UP 5.5 at 9927.5. A drop of 11 bps in that one-year spread! The ten year note fell 13 bps to close sub 3% at 2.97. The buyer of 60k TYQ 126/127c spd Tuesday at 5 and 6 nearly doubled his money…9/11 at end of day yesterday.
–This time the Federal Reserve may be handcuffed in deploying “emergency” measures, especially having come under withering criticism of aiding non-US bank Dexia last time. There is little public support in terms of helping the banks these days, unless by help one means the gallows. A lot of tech stocks had new low closes for the year. HPQ, CSCO, YHOO, GOOG, MSFT, TXN,. AAPL near year’s low.
–Today’s news includes Job Claims exp 420k. Housing Starts…doesn’t matter, Philly Fed expected 7.0 from 3.9.
