May 15. BOJ wants higher bond yields?
–Libor/ois compression continued to be the main story, with EDM8 +2.5 on the day and all contracts from EDU19 back either unchanged or lower. EDZ8 to FFF9 spread had been 39/39.5 last week and closed yesterday at 34.0, -1.5 on the day. This move appears to have been accentuated by strategy exits; while near euro$ contracts closed up on the day, Fed Fund contracts were lower. For example, FFN8 fell half a bp to 9805.0 on an open interest decline of 12k. With a current Fed Effective of 1.70, a hike in June would be expected to put FedEff at 1.95, exactly where FFN8 settled. Prelim open interest in EDM8 was surprisingly +32k, but the large buyer of EDM8 9762/9775c spds for 7.5 was an exit, with OI down 22k and 7k respectively.
–China data this morning said to be weaker than expected, though yoy retail sales of 9.4% isn’t exactly weak, especially when compared to today’s US release, expected +0.3 and +0.4 less autos/gas (month-month). What’s significantly more important is a Reuters article relating to the BOJ: “But central bank policymakers have begun brainstorming ways to raise bond yields from near-zero levels as a first step toward ending crisis-mode policy, sources familiar with the BOJ’s thinking say.”
https://www.reuters.com/article/us-japan-economy-boj-analysis/bojs-kuroda-shifts-into-lower-gear-on-stimulus-policy-idUSKCN1IG0WN
–The tide of global liquidity is slowly receding. Another interesting side note comes from BBG: “The delinquency rate for subprime auto loans more than 60 days past due reached the highest since 1996 at 5.8 percent, according to March data, the most recent available from Fitch. That compares with default rate of around 5 percent during the financial crisis in 2008.” According to the handy chart, subprime auto loans as % of ABS are at a record high over 20%. But I’m sure there’s plenty of salvage value left in that 2016 Kia Soul.
–Once again near ED one-year calendars notched new highs. Peak EDM8/EDM9 closed 57.5, +2 on the day, and EDU8/U9 rose 1 to 48.5.
