Fraying at the corners
Oct 8, 2019
–Yields rose and the curve flattened Monday on light trade, with upcoming inflation figures and supply weighing. Tens up 4.4 bps to 1.551%. Reds, weakest on the dollar curve, closing -6.375, greens -5.75, blues -5.125 and golds -4.125. Implied vol declined. For example, last Tuesday, ED prices were within a couple of bps of yesterday’s close, and EDM0 9862^ settled 49, vs 46.5 yesterday. 0EH 9875^ from 45.0 to 42.5 now, and 2EH 9875^ from 43.5 to 41.5.
–Consumer credit, released yesterday afternoon, was up a healthy $17.9 billion. However, revolving credit was DOWN $2 billion and non-revolving up $19.9B. Let’s go back to school. The democrats will pay for it! (Non-revolving is student loans and auto debt).
–Today’s data includes PPI, with yoy Core expected +2.3%. Three year auction as well, with tens and thirties to follow Wed and Thurs.
–A couple of interesting charts cited by the Daily Shot yesterday indicate that credit conditions at the perimeter are fraying. I have attached a St Louis Fed chart showing CCC yield spread, which is now at 11.08% testing the level from late last year when markets were unraveling. I’m sure part of this is due to WeWork. For now, it doesn’t seem to be seeping into markets at large. For example, in late 2018, the last time CCC spread was over 11%, HYG had plunged to 80. It’s now holding near the highs above 86.
