April 17. Does the curve mean anything?
–“The level of attention to the recent and mild inversion of the yield curve has bordered on hysteria in the media. Does it portend a recession? Or is, as Ethan Harris, the chief economist of Lehman Brothers suggests, the bond market simply on drugs?” A clue that this quote isn’t current comes from the Lehman reference; it’s actually a quote from John Mauldin from December 2005. The last Fed hike cycle was from mid-2004 to mid-2006, and the curve inverted at end 2005 or the start of 2006. (As an added kink, in the years from 2002 to late 2005, 30 year bond auctions were suspended; resumption was announced in August of 2005). GDP grew but decelerated in 2006 and 2007. Stocks didn’t put in the highs until late 2007. Lehman closed.
https://www.mauldineconomics.com/frontlinethoughts/the-yield-curve-mwo123005
–Yesterday, the back end of the eurodollar curve saw continued minor inversion. It doesn’t appear as if the flattening trend will change as long as Fed officials studiously ignore negative ramifications. A couple of charts below, EDZ20 to EDM21 closed at -1.0 (9706 and 9707). Red/gold pack spread settled at a new low of 9.0, below the 2006 low but above the low of 2000. 5/10 at 15 bps; 10/30 at 20 bps.
–There was an early buyer of 35k EDZ8/EDZ9 spread at 31.0 (settled there) appears to be new. EDZ9 continues to be the peak of open interest in dollars at 2.166m contracts. EDM8/EDM9 settled 42, +2.0 on the day, helped in part by a large buyer of 0EM 9712.5p, paying 5.0 ref EDM0 9720.5 early and then 4.5 covered 22 late. Open int rose by 27.5k; this put is the peak midcurve open interest at 606k (33 delta). In spite of some put buying, vol edged lower. For example, 2EM 9712.5^ went from 22 Friday to 21.5 yesterday, and TYM 120.5^ settled 1’06 or 3.5.
–A lot of Fed talk today: Williams at 9:15, Quarles at 10:00 (semi-annual House Fin Services testimony), Harker at 11;00 and then Chicago’s Evans to wrap it all up in a dovish package at 1:40. (Dudley yesterday reminded us that financial conditions remain quite accommodative). Retail Sales solid yesterday at +0.6, today brings Housing Starts and Industrial Production, expected +0.3.
–Top chart EDZ0/EDM1, 6 month spread. Lower chart red pack to gold pack in Eurodollars (2nd year to 5th year).
