Jan 19. Yellen’s Core Message- higher rates
–The main event yesterday was, of course, Yellen’s speech on monetary policy. While she didn’t mention upside risks due to fiscal policy, or instability caused by frothy financial assets like Commercial RE, the message was one that accepted the idea of steadily higher rates. Eurodollar calendar spreads rebounded slightly off the lows which had been made this week, though the curve still seems too flat. For example, the one year spread June/June (EDM7/EDM8) settled at just 51, an indication of just 2 hikes per year. A headline on the FT this morning says “Fed officials prepare ground to cut bank’s $4.5tn balance sheet“. Recall that during the taper tantrum of 2013, further back one-year spreads (for example middle reds to middle greens) shot up to 90 bps. Currently the red/green pack spread is just 34 bps.
–A lot of the damage yesterday was done after the futures settlement, as Yellen’s speech began right at that time (3pm EST). For example, at the futures close I marked the five year yield at 188.7, and by 4:45 EST it was 4.5 bps higher at 193.2. Tens went from 239.1 to 242.8, a rise of 3.7. The dollar also firmed, with $/yen posting an especially dramatic reversal – outside day and closed near the high of 114.77.
–ECB today with Draghi expected to maintain dovish posture and contain expectations. News in the US includes Housing Starts at 1.2m, Jobless Claims at 255k, and Philly Fed expected 16 from 21.5.
–There was a late (post Yellen) block trade yesterday, +50k EDM7 9887/9900c spd for 2.5. This spread had settled 2.75, and appears to be a fade for the possibility of a Fed hike in March.
