Oct 22. Risk on?
–China steps in to support stocks and Italy vows to stay in the euro….so ‘risk-on’? A late downgrade on Friday of Italy’s sovereign debt to a notch above junk was taken in stride. Friday featured continued weakness in the front end of the curve with EDZ8 settling -1.0 at 9723.0. Late in the session Fed fund contracts came under additional selling pressure with FFF9 trading 9759.5 or 2.405, 21.5 bps above the current Fed Effective of 2.19%. November Fed Funds trade 9780, exactly equal to current IOER of 2.20%. Looking for a bounce, there has been a reasonable amount of 9725 call buying: EDZ8 9725/9737/9750 c fly, EDH8 9725/9737c 1×2. Also worth taking a look at EDF9 9712/9725 call spread which was around 2.5 vs 9707.
–This week sees treasury issuance in the form of 2y, 5y, 7y and 2y FRN. Should hold down front end of the curve, especially with an equity market bounce, though earnings loom large for the latter (MSFT, AMZN and GOOGL this week). A story on WSJ says customers are ditching banks that are paying close to zero for deposits and searching for higher yielding alternatives (whihc doesn’t seem that difficult given 3-month bill yield north of 2.25%). Higher yields could also prove to be competition for stocks. Tips are giving a real yield of better than 1%, with added protection from an increase in inflation.
