Risks building for stocks and bonds
November 11, 2019
–Hang Seng down 2.6% as violence in Hong Kong escalates and Shanghai Comp -1.8%. US stock futures also point to a lower open on this holiday session and bonds are seeing a very modest bounce.
–Curve continued to steepen Friday with 2/10 posting a new high at 26.6. Twos fell 1.1 bps to 1.662% and tens rose 1.1 to 1.928%. Red/gold pack spread in dollars edged up by 1.125 closing at a new recent high of 20.25. Bloomberg ran a story identifying an increase in ‘term premium’ relating to last week’s bond sell off. Anyone else can just take a casual glance at prices and say, ‘we sold off’. Maybe the Fed buying t-bills and the treasury auctioning long bonds has something to do with the steepening? Nah.
–In front of Powell’s testimony before Congress this week, the market has become comfortable with the idea of a pause or a possible end of the rate cut cycle. Jan’20/Jan’21 FF calendar is -19.0, no longer indicating certainty of even one ease next year, while EDH0/EDH1 settled -13.0.
–One large trade of note Friday, 0EH0 9925/9975cs vs 0EZ0 9925/9975cs, a buyer of the deferred call spread 50k for 4.25. This is a roll, out of a previous long of 0EH and into 0EZ0 (the mullet) which expires in December of 2020 on EDZ21 underlying. In spite of a steepening of calendars, there are still those buying protection for the possibility of zero rates.
–A friend highlighted Lagarde’s quote from earlier this month, “We should be happier to have a job than to have our savings protected… I think that it is in this spirit that monetary policy has been decided by my predecessors and I think they made quite a beneficial choice.” It’s really an amazing line on so many levels. Is this one of the reasons that European bonds accelerated their sell-offs? Is it an embrace of the American model of a ‘just in time’ cash flow rather than a stock of wealth? A shift from capital to labor? There’s a post on ZeroHedge today that notes Spain and Italy see the highest usage of cash for payments rather than [more easily tracked] cashless transfers. Savings at risk? Hoard cash….
