Real yields deeply negative
July 15, 2021
–Powell remains all-in to bring employment level to “full”. He noted in testimony that official data underestimate unemployment. The dual mandate of low inflation and full employment with a backdrop of financial stability has been replaced by one goal, based on data that the Fed Chairman calls faulty. PPI yoy of 7.3% was ignored. There is a price-insensitive buyer of the long end, bringing the thirty year yield below its level before Tuesday’s auction. The auction yield was 2%; just prior the yield was 1.98% and yesterday at futures close it was 1.987, down 4.6 on the day and lower yet this morning, as China’s Q2 numbers were soft. I would put full employment in the 4 to 4.5% range, but I think the Chairman is shooting for 3.5. Full throttle accommodation will surely get push-back at the next FOMC, but that’s still two weeks away!
–On Tuesday there was a large seller of TYU 132.5/134.5 strangle at 49, which settled at 54 as bonds slid post-auction. However, vol was hit yesterday as higher yields were rejected, with the strangle settling 46 vs TYU settled very near the exact midpoint at 133-145. TYU vol at 4.0, the low end of the recent range. Prior to Powell, there was a buyer of 20k TYU 133/132p 1×2 for -1 to flat. Settled flat (36 and 18). Flows suggest a lull in activity for the next month and a half.
–As expected, Bank of Canada trimmed bond buying to C$2 billion per week. BA’s rallied. There was a new buyer of 50k EDM2 9975.5 which is where the contract settled, +3 on the day. If libor stays about where it is, just under 13 bps, then EDM2 should rally approx 1 bp per month. Gold is getting a boost, with GCQ 1833, having bounced about $70/oz from the low at the end of last month. I have attached a chart of the US ten-yr inflation indexed note yield, which closed below negative 100 bps for the first time since February. The St Louis Fed website has the low at -108 last year, though I recall seeing -112 last summer.
