Emergency backstops in question?
November 20, 2020
–Tens fell 2.8 bps yesterday to 85.2 and yields are a shade lower this morning going into Dec treasury option expiration. 5/30 notched a new recent low at 119.3, also down 2.8 on the day. As of this writing, expiring TYZ 138.5^ is 11/12 ref 138-135/14.
–Some parts of the economy are showing signs of strength, as reflected by the Cass Transporation report yesterday: “The V-shaped recovery continued in the latest reading of the Cass Freight Index. …shipping volumes were back in the black, with the index posting a positive year-over-year change for the first time since November. …freight shipments showed the best growth we’ve seen since October 2018.” However, the new covid wave is again crushing the service sector, which argues for targeted fiscal relief. Cleveland Fed’s Mester added her voice to the chorus of Fed officials urging fiscal action. In this context, Mnuchin’s letter to the Fed asking to return unused powder to Congress from several emergency lending programs is problematic. The Fed immediately responded that the programs are still needed. This rift is almost certainly politically motivated and not engineered by Mnuchin. I can’t help feeling that Illinois, as the only state that has tapped the Muni Liquidity Facility and is (was) thinking about going to the well again, is in the crosshairs. In any case, with Brainard or Yellen as Treasury Sec’y, Fed relations will be repaired soon. In the meantime, a bit of uncertainty regarding emergency financial backstops is a net negative for equities, while the McConnell/Shumer resurrection of Covid relief talks provides a ray of hope.
–Late yesterday EDZ0 9975 puts traded 1.25 with three weeks until expiry and EDZ0 trading 9975.25/75.5. Not much concern about funding reflected in that price… This morning EDZ prints 74.75.
