Fixed income pressing lower
October 19, 2020
–Yields little changed on Friday with tens up 0.8 bp to 74.2. However, with stocks powering higher this morning due to (choose your reason) vaccine hopes, stimulus hopes, China’s rebound, fixed income is lower. The low so far in EDH’24, blue March, which has seen exploding midcurve put activity, is 9945.5 on Oct 9. This morning it sits at 9947 as the ten-year yield prints 77.4. (The high 10y yield this month has been just under 80 bps).
–As mentioned over the weekend, several Fed officials appear to be concerned about levitating stocks, as interest rate policy is handcuffed near zero. Over coming weeks we’re likely to see announcements of new macroprudential rules in an attempt to constrain “excessive speculation”. My assumption (which could be incorrect) is that a Biden administration will also move toward heavier regulation. In the short term, perhaps a new blast of stimulus will outweigh the prospects of increased regulatory burden. Powell takes part in an IMF panel on cross-border payments today. Not likely to be any regulatory hints there, but Clarida speaks on the economic outlook mid-day, and there will likely be mention of pockets of undue risk-taking.
–Nov treasury options expire Friday. With TYZ 138-26, the TYX 138.75 straddle is 27.
