Beyond reds
November 5, 2019
–Does supply matter? We’re about to find out this week as treasuries look to re-test the lows made just prior to the FOMC meeting last week, as auctions kick off with today’s $38 billion 3-yr (followed by 10’s and 30’s Wed and Thursday). Aside from supply, US/China talks appear to be progressing. For a long while, it didn’t seem to matter how much of a cash burn some companies generated. Now the market cares, as evidenced by UBER yesterday.
–The curve steepened with 2/10 up 2.8 bps to 19.4, near the recent high. Twos rose 2.8 bps to 1.59% and tens up 5.6 bps to 1.784%. Red/gold ED pack spread was up only 1.375 to just over 14 bps. Option activity was primarily selling, though activity was light.
–Jan20 FF settled 9846.0, just 4 bps higher than Nov, which has, of course, priced last week’s rate cut, settling at 9842 or 1.58%. The market is pricing a pause at the Dec FOMC, another negative factor for fixed income. FFF20/FFF21 settled -26.0 (one cut anticipated over the year). The peak area on the euro$ strip is the last two reds, EDM21 and EDU21 having both settled 98.51. The reds have been the apex of the curve for some time. In a policy environment where any thought of a hike has been shelved, the back contracts (beyond reds) should start to decline a bit more aggressively.
–The Fed’s Senior Loan Officer survey for October was released yesterday. Banks reportedly left standards on C&I loans unch’d, but demand for such loans reportedly weakened. Where demand was more robust, for credit card loans, banks reportedly tightened their standards.
–Today”s news includes JOLTS at 706.3k and ISM Services, expected 53.5 from 52.6.
