Risk free rates
June 9, 2021
–The ten year note yield dropped 4 bps to 1.526% yesterday in front of today’s $38 billion auction, and futures are slightly higher yet this morning. Various reasons given for continued strength in bonds. I saw one article surmise that taper bets are receding, while another said that inflation concerns are receding. An article in the FT suggests that the Fed risks “reacting too slowly if inflation keeps rising.” China’s PPI was released at a blistering 9% yoy, while Chipotle is raising prices by about 4% to cover rising labor costs. Perhaps one of the big and simple reasons for continued strength in bonds is reflected by the settlement of the front July eurodollar contract at 99.89, which I believe is a record high ED settlement at just 11 bps. Yesterday’s RRP operation was also a record, at $497 billion. Everything appears to be floating on a sea of endless liquidity with near zero carry costs. They used to warn that the Fed was intentionally pushing people farther out on the risk curve due to low rates. I don’t hear that much any more, now that the “risk curve” has extended past the far horizon with a new crypto every five minutes.
–I didn’t read details, but also saw an article noting angst at the possible end of the student loan moratorium. Let’s say for a minute that the reason bonds are bid is because the rent moratorium will end, unemployment benefits will end, and the government infrastructure plan will be significantly trimmed back. In short, that government support, which has been pumping up the balloon, will be sharply curtailed. If that is the case do stocks belong near record highs? In any event, none of the forward scenarios seem particularly supportive for the dollar, and a weaker dollar is inflationary.
–Yesterday featured new recent lows in many curve measures, with 2/10 at 137.5, down 3.9 bps and 5/30 at 144.3, down 1.3. The red/gold eurodollar pack spread closed down 3.125 bps just over 150. This, in front of a CPI number expected to be north of 4.5%. Buyer yesterday of 2EZ 9912/9900/9887p fly for 1.0, with EDZ3 trading 9909.0. Time until expiration is 184 days; it’s a bit early to be pegging the price of green Dec. On the other hand, midcurve June options expire Friday, with 2EM 99.4375^ settling 4.25. Breakeven 99.48 on the upside and 99.395 on the downside. So 8.5 bps window for profit on the June midcurve straddle in 2 days if sold, with a 23 bp window of profit on the 2EZ fly if bought, with 184 days. Of course, a short straddle has open ended risk (but not with the Fed in charge, right?)
