US 10Y yield at lowest since Trump was elected

June 4, 2019

–Now THAT was a proper rally.   The strongest eurodollar contracts moved forward on the curve with EDZ9 and EDH0 leading, up 13.5 on the day.  Credit Suisse was out early with a note saying the first ease might be in July, and Bullard followed, saying a cut might be warranted due to trade issues and low inflation.   Powell speaks this morning on policy strategy; he’ll likely hint about a more rapid end to the taper.  The 2-yr note plunged 10.2 bps to 1.842%, with tens down 6.2 to 2.08%.  The 2/10 spread closed at a new recent high of 23.8 bps.

–So what do you do with the dot plot?  At the March FOMC, the projected FF rate for the end of 2019 was 2.4%.  That was down from 2.9% in December.  The 2020 projection was 2.6%, down from 3.1% in December.  Yesterday, EDZ19 settled 98.04 and January 2020 Fed Funds settled 98.275, rates of 1.96% and 1.725%.  The June FOMC is a bit over two weeks away.  Should the dots drop ANOTHER 50 bps to try to line up with the market? 

–All ED calendar spreads from EDZ19 forward rallied.  Red/gold pack spread gained another 8 bps to close at a new recent high of 40.75 bps (reds +11.5, greens +9.625, blues +6.625, golds +3.5).  The metal gold has also surged as markets search for safety.   October Fed Funds settled 9799 or 2.01%, about 40 bps lower than the current Fed Effective.  Chance that the first ease is 50?  (Oct funds cover June, July and Sept FOMC meetings).  Call ratio spreads which essentially reflect the view that markets can rally slowly but are unlikely to surpass upper strikes, have blown up spectacularly.  It’s hard to get this type of violent move without the fuel of forced buying.  However, the back end of the market isn’t experiencing the same vol surge.  Example, 0EZ atm 9837.5 straddle settled 51, ten bps more than 3EZ atm 9812.5 straddle at 41.0.

–As the chart below shows, the ten year is at the lowest yield since President Donald Trump was elected.  Do lower long term rates save the economic environment when tech stocks are under regulatory attack and global trade is declining? 

Posted on June 4, 2019 at 5:14 am by alexmanzara · Permalink
In: Eurodollar Options

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