Sept 5. Five year note being gutted
–Relentless rise in yields continues as the five year note rose nearly 7 bps to 1.74. Tens up nearly 5 bps to 289.5. Five year note futures added 24k in open interest as there was a buyer of 50k FVX 118/117.5p spreads. With FVZ closing just below 119, the upper strike is about 19 bps out of the money, suggesting a target of 2% in the 5 yr note yield. 5/30 continues to flatten on the bear move, down nearly 5 to just under 206. In May, the 5 yr note was yielding around 64-65 bps, In terms of the percentage increase in rates further out the curve, I would say that this has been an historic move, though major cracks have yet to surface. In fact, auto sales have completely recovered to pre-crisis levels even though miles driven continue to decline, and the Beige Book mentioned that the rise in rates is spurring home buying in some districts to lock in relatively attractive funding rates.
–Kocherlakota suggested last night that the Fed needs to provide more accommodation. ECB meeting today; Draghi is expected to lean against the recent rate rise and stress fragility of the recovery. Russia and China are urging caution in US monetary policy as G20 meeting starts, warning of (further) spillover effects as policy tightens. Eurodollar calendar spreads are widening, with new highs in near one-year spreads. Dec’13/Dec’14 settled at a new high 48, up 4.5 on the day.
–Besides the ECB, there is plenty of US news including ADP expected 177k, Jobless Claims 330k, Factory Orders -3.4% and Service ISM, 55 from 56 last. Though the US population appears solidly against involvement in Syria, a Senate panel yesterday backed Obama’s plan for a limited strike. The Fed’s transparency with regard to tapering has sparked a pre-emptive market adjustment that has likely taken Fed officials by surprise. The process of transparency on the Syrian situation also allows for posturing before the fact which may similarly lead to unintended fallout, almost exactly 12 years after 9/11.
