Tips provide very few tips
May 18, 2021
–Three-month May Eurodollar contract had its final settlement yesterday at 99.8504, the highest final settle ever for a eurodollar contract with libor at a record low 0.14963. Interest rate futures were quiet, with the ten year yield closing unchanged at 1.637. There was continued buying of 2EN 9900p for 6.0 as open interest rose another 12k to 110k. (settled 5.75 vs 9916).
–I didn’t read Clarida’s comments from yesterday in full, but here are some bullet points from Bloomberg:
*CLARIDA: USD’S GLOBAL ROLE SECURE IF POLICIES RUN RESPONSIBLY
*CLARIDA: WILL GIVE ADVANCE WARNING BEFORE TAPERING BOND BUYING
*CLARIDA: UPWARD PRESSURE ON INFLATION IS LIKELY TRANSITORY
–Just a couple of comments, when the Fed talks about the dollar’s reserve currency status, you know it’s a problem. Dollar policy is the purview of the treasury. In the old days, the Treasury Sec’y would get up and say, “A strong and stable dollar is in the interest of the US.” Those days are gone. On the inflation topic, I think it might be Clarida who noted that the ten-year inflation breakeven is below that of the five-year, which lends support to the idea of “transitory-ness”. I have added a chart with both measures (5yr in white, 10 year in amber). It almost sounds like a sophisticated argument, looking at arcane financial data to divine the true state of affairs. But actually, it’s stupid. Um…look at the direction of the lines. Note also that the ten year is above 250 bps. Finally, even though everyone including me watches breakevens, they’re not very good at predicting inflation or lack thereof. Might as well rest your inflation argument on the forward price of gold. “The spread between June’21 and June’22 gold is only $10.90, with the deferred contract only about 1/2 percent higher. Therefore, there’s no inflation.” Feel better now? If the dollar crumbles, then the tips thesis goes out the window.
