Real yields deeply negative

July 15, 2021

–Powell remains all-in to bring employment level to “full”.  He noted in testimony that official data underestimate unemployment.  The dual mandate of low inflation and full employment with a backdrop of financial stability has been replaced by one goal, based on data that the Fed Chairman calls faulty.  PPI yoy of 7.3% was ignored.  There is a price-insensitive buyer of the long end, bringing the thirty year yield below its level before Tuesday’s auction.  The auction yield was 2%; just prior the yield was 1.98% and yesterday at futures close it was 1.987, down 4.6 on the day and lower yet this morning, as China’s Q2 numbers were soft.  I would put full employment in the 4 to 4.5% range, but I think the Chairman is shooting for 3.5.  Full throttle accommodation will surely get push-back at the next FOMC, but that’s still two weeks away!

–On Tuesday there was a large seller of TYU 132.5/134.5 strangle at 49, which settled at 54 as bonds slid post-auction.  However, vol was hit yesterday as higher yields were rejected, with the strangle settling 46 vs TYU settled very near the exact midpoint at 133-145.  TYU vol at 4.0, the low end of the recent range.  Prior to Powell, there was a buyer of 20k TYU 133/132p 1×2 for -1 to flat.  Settled flat (36 and 18).  Flows suggest a lull in activity for the next month and a half.  

–As expected, Bank of Canada trimmed bond buying to C$2 billion per week.  BA’s rallied.  There was a new buyer of 50k EDM2 9975.5 which is where the contract settled, +3 on the day.  If libor stays about where it is, just under 13 bps, then EDM2 should rally approx 1 bp per month.  Gold is getting a boost, with GCQ 1833, having bounced about $70/oz from the low at the end of last month.  I have attached a chart of the US ten-yr inflation indexed note yield, which closed below negative 100 bps for the first time since February.  The St Louis Fed website has the low at -108 last year, though I recall seeing -112 last summer. 

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Posted on July 15, 2021 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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