Oct 5. Pressure builds on long end
–From yesterday, *GROSS IN TWEET: ECB TAPER REPORT BEARISH FOR GLOBAL BONDS. Know what else is bearish for bonds? Higher inflation premiums, and that’s what appears to be starting. Gundlach says he owns tips for the first time in a long while. December Crude oil has continued to rally and this morning is above $50. Both 5y5y infl frd swaps and the tip/treasury yield spread have been firming. Italy issued 50 yr bonds (at a yield of 2.85%). As Trump might have said, “It’s brilliant! We issue long dated bonds at low yields just as central bank support is poised to pull back, saddling widows and orphans with instant capital losses (which they can use to cut forward tax liability).” In Japan, yield targeting apparently isn’t going to go past ten years. In the UK the 5y5y inflation swap is also surging, as new lows in GBP raise concerns about the price of imported goods. All of which suggests that curves could steepen, and indeed yesterday both 2/10 and 5/30 rose, to 86.3 (+3.7 bps) and 118 (+2.6). There was a large buyer of TYX 130 puts early in the day at 9-12, with open interest up 25k on volume of 78k, price settled 18. The ten year yield on its own rose 6.1 bps to 168.1. And to top it off, Loretta Mester suggested two days ago that a hike could occur in November, and ultra dovish Evans didn’t rule out November and said he would be ‘fine’ with a hike in Dec. By the way, open interest in Nov Fed Funds went up 10k on new selling, with a settle of 9957.5. With no hike, the risk is up to 9960.5. As mentioned yesterday, it’s probably much better to just sell EDX6 at 9910.5 which also prices in odds for a Dec hike.
–News today includes ADP expected 165k. Non-mfg ISM expected 53.0 from 51.4. Factory Orders -0.2 from +1.9. Trade data as well, expected -$39.0 B
