Inflation internalized
August 12, 2021
–CPI which came out as expected 5.4% with Core 4.3%, was easily absorbed. Price pressures appear to be broadening, but fixed income showed little net change. Solid ten year auction results with a yield of 1.34%, about 3 bps thru. Indirects, related to buying by foreign central banks, went from just over $24 billion at the last two auctions to $31 billion yesterday. I can’t help but think that the new SRF (Standing Repo Facility) is supporting foreign demand, which may also occur with today’s 30-yr. It’s still awfully hard to reconcile a ten-yr yield just over 1.3% with core inflation over 4%, but if the Fed wants to provide unlimited carry, it makes more sense.
–What is interesting is that even with an exceptionally strong 10 yr auction, the eurodollar curve steepened a bit more, with reds to golds (2nd to 5th spread) making a new recent high at 113.25 bps, up 3.5 on the day. I have attached a chart of red/green pack spread (2nd to 3rd year spread) which also moved to a new recent high of 58. Since March it has been in a sideways range of around 45 to 67 and is now in the middle. Relative pressure on greens indicates the market is still expecting hikes…greens are EDU’23, Z’23, H’24, M’24.
–Implied vol was hammered, for example EDM’23 9925 straddle down 2 bps to 55.5. Notable long liquidation of TYU puts, mostly in 133p. No fear of today’s PPI with Core expected 5.6% ypy. There is also a crop report at 11:00 CST.
