Payroll day
June 4, 2021
–Yields rose modestly in front of today’s employment report. Tens +3.2 bps to 1.623%. Curve steepened with twos up only 1.3 to 15.8. NFP expected 650 to 675k. Yesterday’s ADP was 978k and ISM Services were at a record high 64.0. The bond market has been tremendously resilient in the face of rising commodity prices, pockets of dislocation in stocks, and robust economic data. The 1.60% yield level has been like a magnet. However, as the June 16 FOMC meeting draws nearer, bringing the prospect of a modicum of restraint with respect to policy, I think a move to higher yields is probable. The “risk management” reason for extreme accommodation has been the possibility of a covid variant resurgence, which appears to be less likely as time goes on.
–July WTI (CLN1) is above $69 bbl this morning. Commodities generally remain in strong uptrends. Here’s how you’re going to know that inflation is NOT transitory. When Fed officials start blaming speculators for price increases. (Until then, they can keep discussing core Fed objectives of equality and climate change). Here’s an idea: how about doing something about the incredible pressure on short end rates due to massive excess reserves, a situation which is making some think that the low funding party will never end?
–New recent high in EDU1/EDU2 yesterday at 15.5, up 1 on the day. Also quite a bit of buying of put spreads vs call spreads in dollars, most notably a new buyer of approx 50k 2EZ 9900/9887.5ps vs 9925/9937.5cs for 0.5 to 1.0. Settled 1.25 with the put spread 5.0 and call spread 3.75, but the put spread is at the money, with EDZ2 settling 9900.5. I’m probably guilty of trying to fit these trades into my bias toward higher rates and a faster response by the Fed, but action on the eurodollar curve does seem to be moving slightly forward.
