Sept 3. Relentless rise to higher yields
Sept 3. Ten year posted a new high yield at 291 yesterday before easing back to close just under 285 (up 9 bps from Friday). Option trade still leans heavily to put buying, with implied vol strengthening on the down trade. Ten year inflation indexed note also gained about 9 bps from Friday, having now done a full round turn from a yield of around -70 bps in Q1 to +73 bps yesterday (chart attached). As previously noted by many analysts the rise in real yields in the US has corresponded with a receding tide in emerging markets, and to paraphrase Warren Buffet, we now have discovered many bathers without swimsuits. New low yesterday in Russian Ruble and in rupiah. Turkey, Mexico, India, Brazil remain very weak.
–I saw a note yesterday that said a long term average in real yield is about 2%, which would indicate a long way to go for reversion. However, US inflation levels still remain quite tame (according to official readings) and it’s far from clear that the US economy can weather a Syrian strike, the impact of higher funding costs on interest rate sensitive parts of the economy like housing, an equity market that has suddenly become less buoyant, and an emerging market meltdown.
–The only notable put seller yesterday was in FVV 117.75p, about 40k sold as new position (likely against other existing long puts) at 9-10.
–Today’s news includes Trade data and the Beige Book this afternoon. Also a few fed speakers…
