Lower yields
June 29, 2021
–Quiet session Monday which featured new highs in Nasdaq and SPX along with falling bond yields. TYU1 settled 132-08+ with a cash yield of 1.478%, well above the data release on Friday which showed Core yoy PCE prices +3.4% (TYU around 132-04 at the time). Interest rate futures continue to shake off bearish news as we go into Friday’s payroll report. In dollars, there was a new buyer of 20k EDZ2/EDZ4 calendar at 106.5 to 107. The spread settled 104.5. Trade appears to be an add to purchases made just after the FOMC, when the price was 118. Just over 100 bps for a two year period when growth and inflation are buoyant seems quite low, but that’s the theme of US rate markets. Red/gold euro$ pack spread (2nd year to 5th year) fell just over 3 bps to 124. From 2004 to 2006 the Fed hiked at every single FOMC, 200 bps per year. Markets are currently hard pressed to see anything more than 50 bps in a given year.
–Neel Kashkari has a piece in the FT with the title “Banks cannot expect government to bail them out of every crisis. (they must increase their equity funding to protect against the next unexpected shock).” Almost by definition, the entire financial system is bailed out of all “unexpected” shocks. That’s why the Fed runs reassuring stress tests to allow for share buybacks and dividend increases. The real question, yet to be answered, is if the next unexpected shock will be a direct consequence of the unprecedented magnitude of the covid bailout.
