June 11. Receding risk in Italy meets treasury supply
–Three and ten year treasury auctions today. Yields edging slightly higher this morning after ending nearly unchanged Friday, but implied vol had a powerful bid going into Friday’s close, into what BAML is calling the most important week of the year. As an example, on June 4, 0EZ 9700 was 36.5 vs 9702.0. On Friday against the same futures level it settled 39.0 and was well bid at that level after futures settlement.
–G7 lived up to its advanced billing as G6 + 1, but the euro has strengthened this morning as Italy’s economy minister Tria has vowed to stay in the euro and cut debt (also helping equities). Now we move to the theatrics of the Trump-Kim summit.
–On the eurodollar curve, green/blue pack spread settled at just 2.25 bps. Greens are the third year out, (starting June 2020) and blues are the fourth (starting June 2021). So as Trump’s term draws to a close, the market is forecasting economic malaise? Perhaps that’s not the exact interpretation, but for whatever reason the back end of the curve is remarkably flat going into Wednesday’s FOMC. EDH20 is 9700 and EDH22 is 9694.5. As the Fed hikes Wednesday and brings Fed Funds approximately equal to the rate of inflation, the prospect of inversion appears closer. However, a negative reaction by emerging markets (perhaps impacting global equities) could diminish the market’s perception of forward hikes, even as the Fed vows to continue with gradual tightening.
