Corporate Bonds

August 1st, 2014 11:41 am

The corporate market is quiet with little trading. Little is trading and I suspect if some BWIC lists hit the shore that  traders would tremble.

The IG 22 was 3 wider on the day a few minutes ago.

Holy Spirit Suspended

August 1st, 2014 11:09 am

And I hope that is not blasphemous.

Via a fully paid up subscriber there is also this:

Banco Espirito Santo Shares Suspended Pending Information
2014-08-01 14:58:04.274 GMT

By Anabela Reis
Aug. 1 (Bloomberg) — Portuguese securities regulator
suspended Banco Espirito Santo shares from trading pending
information about the lender, CMVM says in statement on website.
* NOTE, Earlier: ISDA to Rule on Espirito Santo Financial
Bankruptcy Event {NSN N9MTA86S972G <go>}

Asset Allocation?

August 1st, 2014 11:00 am

Via a fully paid up subscriber:

(Asset Allocation) Talk large ETF re-allocation taking place today: $4.5bn Selling Equities to Buy Bonds (usually it centers between 3-10yr.)

Breakevens

August 1st, 2014 10:28 am

Via Richard Gilhooly at TDSecurities:

We commented late yesterday that 5yr Breaks were elevated at 205bp, buoyed by month-end buying and excitement over the ECI report, only to be let down by the dismal but consistent lack of wage growth in today’s employment report. Six months in a row now that jobs are over 200k and the Treasury market reacts with a wholesome rally. The front-end has now bounced by 7-8bp in 2s and 3s and the ‘strong’ GDP number is a distant memory.

At this point, the weak Chicago print is being treated as an outlier but the proximity to the 50 level cannot be dismissed, although other signs of weakness have not been seen. In fact, the surprise in the NFP report was the strength in goods producing jobs, construction and manufacturing at the expense of weakness in service sector jobs. ISM just confirmed that strength, coming in over 57 and sending bonds briefly back to the lows of the day before bouncing again on weaker equities.

Gasoline futures are another 4c lower this morning and now a full 36c off the late June highs in an amazing reversal that has sent XBA went under its 200-day and close to the lows of the year. CPI estimates for July/August will not be adjusted in real time and as a result we are starting to see some belated pressure on 5yr Breaks. Having gone out bid at end-month at 205bp, they adjusted lower shortly after NFP and the 0 wage component after some accounts had apparently been hyped on the ECI reading. The recent low was 199bp a few days after the weak CPI reading for June and we expect that level to break in coming days as CPI estimates are moved lower and negative carry calculations move higher.

Market Thoughts

August 1st, 2014 10:14 am

I just spoke with a buy side investor regarding his views on the market. He thinks that over the next few weeks the market will regain a stable footing and resume narrow range bound trading. He offered the opinion that the somewhat soft labor report this morning offsets the hawkish GDP print earlier in the week. In his view a hawkish labor report today would have increased fears that Ms Yellen would have thrown a bone to the hawks at the Jackson Hole conclave later this month. He had believed that she might have focused her speech at that conference on balance sheet reduction while now she can focus ( as is her wont ) on continued slack in the labor market and on the ambiguous signals from her dashboard. He also notes that at the next FOMC in September the Committee will likely reduce its forecast slightly for 2014 growth.

I inquired regarding his opinion on crowded trades and he think that long spreads in the 2 year and 3 year sector is very crowded. The 2 year spread has moved recently from 14 to 21 and the 3 year spread has jumped from 9 to 21. That he said is a function of the last set of minutes which discussed the appropriate spread between reverse repo and IOER and encouraged these trades.

 

Ron Paul Sees a Bubble (and Unicorns)

August 1st, 2014 9:22 am

Via Bloomberg:

Fed Policy Is Propping Up Stocks, Time for Correction: Ron Paul
2014-08-01 13:05:00.0 GMT

By Vivien Lou Chen
Aug. 1 (Bloomberg) — U.S. stock market is “grossly
distorted,” has formed bubble as risky as one that led to
recent financial crisis, former Congressman Ron Paul said.
* It’s “absolutely” time for a correction, Paul said in phone
interview yday
* Drop in global stocks yday was “a warning sign”
* “I’d be surprised if the stock market is higher at the end
of the year than it is now. I think there’s gonna be some
air let out or it will collapse completely”
* Bubbles also forming in bonds
* “The whole thing about Fed policy is that it’s designed to
get stock prices high, and people to spend more money. It
sounds good until you have the bubble burst”
* “Right now, Fed officials are facing a bit of a dilemma
because maybe they shouldn’t have bought quite so much debt
and rates will have to go up. They have a lot of management
to do on a system that’s unmanageable”
* “If they don’t decide to buy something else” after QE
ends, “and if they allow interest rates to rise as they
normally would, that’s going to cause panic”
* While 2Q GDP figure of 4% sounds good, “there’s just as
every bit as much of a chance we’ll go into a slump”
* Yellen is doing as well as expected; “she’ll live up to
her image and won’t be afraid to print money” if needed
* Personal criticism of Fed has “always” been about its
policies and system, “not the person”
* “I see them as managing an unmanageable system” built on
fiat currency
* Link to Paul’s comments on Fed decision:

Treasury Market

August 1st, 2014 9:19 am

Treasury traders report light flows amidst the steepening curve. Dealers report robust central bank buying in the 3 year sector and real money sellers of the intermediate sector.

I think that the markets were anticipating a dire outcome and did not receive it. The local trade will be to cover shorts in the belly. One trader noted that the price action today is only about position adjustment today following the outsized vol of the last two days. In the end the FOMC will not be buying bonds beyond October and the street will busy itself understanding when a data dependent FOMC will choose to hike rates.

Spread Product

August 1st, 2014 8:59 am

At the moment MBS outperforming Treasuries by + to 2 ticks. I have not heard of any meaningful flows in that sector.

In corporate bond land spreads were a basis point to three basis points wider pre labor but there is has been very little trading post the data. One fully paid up subscriber suggests that this was a “Goldilocks” number and with equities stabilizing we have an environment in which buyers should emerge and spreads should tighten.

 

 

Post labor Curvology

August 1st, 2014 8:43 am

The Long Bond trades as if it has financial herpes. The 5s 30s spread was 158.6 at 808 and is now 161.6. Similarly 5s 10s has moved from 81.9 to 82.9 and 10s 30s has moved from 77 to 78.5.

With the rate higher and hourly earning soft belly shorts will cover and the dealer community will focus on the round of 10s and 30s which loom just over the horizon.

FX

August 1st, 2014 8:05 am

Via a fully paid up subscriber:

weaker PMI data this seems to have cleaned up yet another round of GBP longs and one wonders if the s/t guys aren’t actually short of GBP at this point. EURGBP cleared out some offers into 0.7950-60 and although we have more into 7970-80 we suspect we are going to start seeing more stops above at these levels

{EU} EURUSD has been in a nothing range between 1.3400-1.3380 the past 24hrs really as it seems its more about the crosses than the EURUSD for now. We do see resistance into 1.3440-50 and suspect that gamma types will be keen to protect 1.3350 for now

{JN} USDJPY continues to consolidate just below 103.00 for now. Desk here thinks there will be offers into 103.20-40 but stops are likely north of 103.50. Down below we suspect there will be buyers on dips to 102.50 but through 102.20 there should be some modest selling as the market is likely a little long of USD. I should add that there are EURJPY offers into 138.00 which helped capped both pairs so this could be the level to watch for both