27 bp euro$, $27 oil
April 22, 2020
–And now, back to our regularly scheduled programming…
–Tens slipped another 5.2 bps yesterday to 57.1 bps while twos edged slightly higher to 20.5. The curve flattened, with 2/10 at 36.6 and 5/30 at a new recent low 82.6 bps. Bank stocks continue to lock shaky; the income generated from a positive curve can go a long way in absorbing lending losses, but the combination of oil imploding and the curve flattening is a gale force headwind. It seems more and more obvious that the US and rest of world needs a much much weaker USD (and it certainly seems that gov’ts worldwide are trying the best they can to destroy the value of money). Maybe that feeds into the reason that gold is up >$30/oz this morning. GCM0 now 1721.00; I would expect a price over 1900 in the next couple of months.
–June WTI (CLM0) is around $11/bbl this morning, while contracts in Q4 are averaging about $27. I think the world can function with oil $25/35, but with governments intent on saving every business including shale, there seems to be little incentive to stop production. Eventually the inventories will come back into balance. We probably need a big Barron’s headline like WHERE SHOULD WE STORE OIL? to make sure everyone is good and short.
–In dollars, reds/greens made a new low just under 9 bps. The second red (EDU1) is now the high price on the curve at 99.73 or 27 bps. It’s like the 27 club in a different context, $27/bbl oil, 27 bps rates. Jimi, Janis, Kurt. They tried to put the economy in rehab, the Fed said no, no, no. At the front end of the curve, EDM0 is holding above 9950 (9951.5 settle) as libor setting grudgingly grinds lower (110 bps yesterday). EDU0/EDU1 is -9.5 bps while EDU1/EDU2 is +7.0. Again, the compression in the back end of the curve at these yield levels is a worrying sign.
–May treasury options expire Friday. With three full sessions left TYK 139.25 straddle is 37/38 vs 139-07. Probably priced about right, as the average daily range in tens have been just under 21/32’s this month or 44/64s. For those that think stocks could fall out of bed, TYK 140c are 4/5, but the high so far this month has been 139-22.
