Short rates tied to zero as critical input prices surge
May 5, 2021
–Crude oil is near new highs this morning at 66.35 (June WTI contract) as API data showed a large draw. Yellen yesterday said rate increases might be needed to prevent overheating, but was forced to walk back those comments later in the day by saying she’s not expecting inflation or rate hikes. Other commodities like soybeans, corn, and copper are on a tear, at or near new highs. It’s astonishing that the mere suggestion of a move off the zero bound is met by resistance. A little over a year ago crude prices tumbled into negative territory, but now the surge in the cost of this systemically critical input is being shaken off as irrelevant.
–Early yesterday morning there was a wave of buying in TY and selling in stocks, perhaps associated with Chinese military aircraft entering Taiwan space, but others suggested a program trade. Open interest in TY rose 36k yesterday and was also up 26k on Monday, so there appears to be new buying in front of Friday’s employment data. Cash tens fell 1.5 bps in yield to 1.59%. Eurodollars rose 0.5 to 2.5 across the strip, with a slight flattening bias. Flows continue to favor put buying and call spread selling in blue midcurves. However, the red/blue September calendar spread declined 1.5 bps, with the red Sept’22 contract up 0.5 to 9968.5, while blue Sept’24 rose 2 to 9851.5. So that two-year calendar is 117 bps. Recall that in the 2004 to 2006 hiking cycle, the fed raised by 25 at every meeting, or 200 bps per twelve month period. Just over 100 bps over two years doesn’t seem like much by comparison.
–News today includes ADP expected 860k from 516k. ISM Services expected 64.1 from 63.7.
