Sept 19, 2018. Sometimes it just gets away from you
–There are a lot of things which should be supportive of US fixed income. EM currencies still appear vulnerable (new low India Rupee for example), some commodity prices are sliding (new low beans yesterday). However, yields are marching higher. Yesterday the 2y hit a new high 279.3. In the 5y, the high yield in mid-May was 294, at floor close it was 292.7, but by the end of electronic it had firmed to a new high just over 294. (Chart of inflation index 5y below, also a new high). Ten year high in May was 311.2 and in the 30y it was 324.7, vs 318.8 close. In 1994, when the Fed began a fairly aggressive hiking policy after over a year at the then historic low of 3% fed funds, things sort of spun out of control, with the Tequila Crisis (MXN peso devaluation in December 1994) one of the results. Interestingly China’s Premier Li says China won’t weaken its ccy in response to trade tensions. We’ve all had trades get out of hand, and clearly the Fed has had things slip away a couple of times, including the GFC.
–Yesterday saw bear steepening, with tens +4.4 bps by floor close to 304.4 and twos up only 1.5 to 279.5. The red/gold (2nd year to 5th year) euro$ pack spread rose 2.5 bps to close just negative at -0.625 bp. Near one-year eurodollar calendars all made new highs with EDZ8/EDZ9 +2 on the day to 51. There continues to be heavy activity in one-year March midcurves. Yesterday a new buyer of 50k 0EH 9650p mostly at 3.5. Settled 4 ref 9684.0. Last week buyer of 250k 0EH 9687/9662/9637p fly 1x3x2; probably not the same player, but the fly is exposed on a break to lower strike (as are all the open put shorts from the long dated ratios).
