Bulls and Bears
–Bullish. The markets like political gridlock. According to one article, there are likely to be subpoenas and investigations. That is, nothing will get done in Congress (example, Mueller investigation). Trump will continue to use executive power to pare back regulations. The Fed will be more cautious in raising rates as fiscal stimulus stops. US dollar falls, helping exports.
–Bearish. Political gridlock. US government debt dynamics worsen, causing the federal gov’t to ‘crowd out’ business borrowers. Rates move higher, especially further out the curve. Political rancor causes confidence to decline and productive investment to fall. Illinois went deep blue, meaning the state’s finances are going even deeper red. Likely to be a crisis within a couple of years.
–Yesterday… ten year yield rose 1.3 bps by the futures settlement to 321.2 and then edged up another 1.6 into the electronic close to 322.8 with TYZ trading 117-29+. The early October high was 323.4. There was heavy buying of Week-2 (Friday expiry) 117.25 puts 6-7. Late market was 8/9 ref 117-29 with 94k having traded. Probably an election hedge, but auctions of tens and 30-yr bonds today are also contributing factors in a move to higher rates.
–New buyer yesterday of 35k TYG9 118 call for 49 (settled 49 vs 118-00). It’s early for Feb options… in previous cycles when off-quarterly options traded in size, it seemed to be premium sales, not buys. For example, back in August, there were early SALES of USX 143 puts at around a point. This also was a good three months away in terms of contract expiry. Same direction, but maybe chose the call side this time because the puts didn’t work out so good.
–Stocks had a nice drift up into the end of the day closing at the high up 19 to 2758.50, however, crude oil was down 1.40 late at 61.70, lowest since April. The front WTI contract at the end of 2017 was 60.42, so we’re only about about 1.25 away from a complete reversal of the year’s rally.
–Relating to credit quality, FT Alphaville yesterday said leveraged loan covenant quality is the weakest on record. Fraying around the edges. Higher rates will cause a tear.
