April 13. Weekly wrap
–Another day, another marginal new low in 5/30 yield spread in spite of the 30 year auction. Spread closed 37.3, down 1 bp; other curve measures holding just above the lows. Stocks found their footing as US policy seems to consist of threats which are then watered down, and we’re on the back end of that mini-cycle at this point. There are also high hopes for a strong earnings season. On a more troublesome note, yields continue to rise, with unabated pressure on libor. EDM8 settled right at the low of 9863, down 3 on the day. When discounting the stream of future earnings do we use libor or fed effective? In any case, Fed fund contracts are also being sold. FFN8 settled 9810 or 1.90% with current Fed Eff 1.69, so 21 bps of June’s hike are priced in. The ten year yield was up 4.5 bps to finish at 283.2. Bloomberg notes that foreign buyers appear to be pulling back from auction demand, citing smaller percentages of indirect bidders at this week’s sales.
–A couple of trades to note. First, about 60k EDM9 9725 puts sold covered, equating to straddle prices of 40.0 and 40.5. EDM9 9725^ settled 40.5 ref 9724.5. Put sales were an exit, with open interest dropping 48k. Second, there was a buyer of 0EZ 9725c vs 2EZ 9725c, only about 8k, buying front at flat and -0.25. Both calls settled 14.75. EDZ9/EDZ0 spread settled 6.5, 9713 and 9706.5. Sure, the spread in front (U9/U0) is 9.5, but the curve is in a flattening trend, there are small signs of inversion, and the Fed doesn’t appear inclined to stop hiking. At this point, I am a BUYER of green (2EZ) calls. There comes a straw in the tightening process when the camel can’t stand anymore, and the back end leads the rally. Sometimes it’s obvious, like November 1994, with a late cycle hike of 75 bps in one go. Sometimes it’s nearly imperceptible. Once again, EDZ0/EDH1 settled -0.5. Contracts from March20 to March 22 are all between 2.875 and 2.99%.
–A few Fed speakers today including Rosengren at 7:30, Bullard at 9:00 and Kaplan on a panel at 1:00. Here’s a quote from a Rosengren speech on March 9, just over one month ago: “To keep the economy on a sustainable path, I expect that it will be appropriate to remove monetary policy accommodation at a regular but gradual pace,” Rosengren said, “and perhaps a bit faster than the three, one-quarter point increases envisioned for this year” in the December projection of appropriate policy by Fed officials. Not likely to be any change there.
