Long end weighed down by stimulus and price pressures
January 15, 2021
–Pressure on the long end continued Thursday with the 30y bond climbing 5.6 bps to 1.874% as Biden’s $1.9 trillion stimulus package was leaked. Tens rose 4.1 bp to 1.129 with the two year unchanged. 5/30 spread notched a new high for the move at 139. Powell was uneventful, saying that policymakers are going to be careful about communicating “well in advance” a reduction of bond buys (though treasuries slid after his comments). Trades in euro$ continue to favor downside, for example another 100k 3EH 9887 put were bought for 1.5, with the underlying EDH4 settling 9928. In terms of timing for a Fed hike, it’s somewhat interesting to look at the green pack (2023 contracts) relative to the blue pack (2024 contracts). Yesterday greens closed +0.25 while blues were -1.25, the spread settled 38.875. Red/green pack spread settled 24. I personally think the Fed will be forced into a hike by the middle of next year as the upcoming inflation data that Powell vows to look past will spark market action that can’t be ignored. Get ready for a bunch of “Is the Fed behind the curve?” articles over the next few months.
–Today’s news includes PPI, Retail Sales and Industrial Production. Equity option expiration and midcurve eurodollar option expiration. Ahead of Wednesday’s locked-down inauguration we will probably see some defensive buys in shorter treasuries.
