Hut Hut....Hike!

Friday, March 12, 2010

Although the Super Bowl is long past us and the sports pages are now dominated by (delete as appropriate) NCAA basketball/Champions League/spring training/Man U takeover talk, Macro Man cannot get the familiar quarterback cadence (cunningly used as the title of today's post) out of his head.

As highlighted in this space yesterday, the market is aflame with rumours today that China will imminently hike either the RRR, its policy interest rates, or both. And not before time, in fairness. With CPI at 2.7%, the benchmark one year deposit rate (currently at 2.25%) is now comfortably negative. Nooooottttttt exactly what you'd call "appropriate" in an economy that rang up a 10.7% y/y growth rate in Q4.

Compare PBOC's lassitude with that of Malaysia's Bank Negara, which a week ago surprised markets by hiking 25 bps, taking its benchmark policy rate to 2.25%. While that is still pretty low, it's at least maintained a positive real interest rate; the last Malaysia CPI print was 1.3% y/y. And of course, the MYR has actually been permitted to strengthen this year (USD/MYR is down 4% already.) Oh, and Malaysia's GDP growth, while robust, is "just" 4.5% y/y....nowhere near China's.
Small wonder, then, that Barack Obama hit the tapes yesterday calling on China to the piss. Might this have implications for the forthcoming Treasury "currency manipulation" report? Inquiring minds want to know....

In the US, meanwhile, every day that passes brings us a day closer to the first positive payroll figure, the draining of excess reserves, and, eventually, rate hikes. The last of these outcomes may still be some time away, in fairness. But still...Macro Man has had an uneasy feeling for some time that there was little risk premium priced into the eurodollar strip.

So he was very interested indeed sent him the chart below of eurdollar midcurve vol (essentially, the vol on shorter-dated options on longer-term eurodollar contracts.) While the absolute number may be high, the trend has been all one way, and there is now less of a "volatility premium" in this market than at any point in the last year...even as other CBs are starting to hike and the Fed itself is rumbling about exit strategies.
While some flow has already gone through the market, picking up some midcurve downside certainly doesn't look like the worst trade in the world, as a "bottom of the drawer" lottery ticket if nothing else. And if Ben Bernanke ever decides to act like Peyton Manning....well, the trade would score a touchdown.

Posted by Macro Man at 8:31 AM  


Someone put an a$$load of HSI puts through before the close according to one of my more flow oriented friends.... interesting stuff.

Nemo Incognito said...
9:11 AM  

Nice terminology for the one-yard line MM.
Eerie quiet here, after milking the clock all week the markets finally moving. No one blindsided I hope.

Nic said...
2:08 PM  

In the comments yesterday LB pointed out that Indirect bids were declining while direct bids were up (on 30 year treasuries). We could add that Bid to Cover on 10 year (USN10YBC) is at all time high of 3.45, auction yields lower than expected.

Demand for treasuries, even longer maturities, appears remarkably healthy. Any thoughts the sustainability of this? Does it augur ill for the economic outlook?

Tyler said...
3:24 PM  

You can almost taste the front end sell off coming...

ed said...
3:26 PM  

Saw 1.00% on the 2y this morning after retail sales, but if you blinked you missed it. There might be value at the front end but it would take a big equity sell-off to reveal it. Staying far away...

Leftback said...
3:53 PM  

And STILL gold cant go up. That usd short end rate creep is showing its hand in Gold ahead of other FX by the feel of it.

Gold's falls over the last 36 hours ( Breaking supports, moving avs etc) and I cant find any decent comment on it. Some trying to say it's relief that Greece
worries are fading, but that really has to be scraping the barrel of "story to fit move")
I suggest that means folks NOT prepared or wanting it .If they did they would be crowing about this leg lower. They aren't.

Elsewhere the markets feel like slack water at high tide. No net movement, but swirls and eddies in disparate areas. None of which point to an overall true direction. So next it all starts to go out ..

Richard said...
4:55 PM  

Tyler - re: demand for treasuries. I've been wondering something similar lately, whether the demand for treasuries (and the persistent bid for higher-quality credit in general) is a direct consequence of the still-hard-to-prove deleveraging mindset.

I've been struggling to reconcile the Fed's data series on households, but the bid in UST does seem to follow a logic process: a) consumers pay off a credit card, b) investor in securitized credit debt finds themselves with (non-interest-bearing) cash prematurely, c) investor purchases treasuries of some duration.

You can even insert a set of steps between b) and c) to include the HY can high-grade corporates, and still have a pyramid of trickle-up payoffs going leading to a steady bid in US Treasuries.

No idea how far off-base I am (and critique away, folks) but it's the only theory I've been able to reconcile with the rise in bond prices, the demand for USTs, and the rising equity markets.

k1 said...
5:07 PM  

k1: Banks are being loaned money at very low rates, and since they have few eligible Barry and Barbara Borrowers that they want to lend to (and they are being told not to take risk), so they take the money and buy Treasuries - then pocket the interest.

Nice business model, unless USTs blow up. Which they won't, according to the Japanese scenario, where the banks are presumably holding JGBs. Wonder what will happen there if they ever have to sell?

There are other domestic buyers of Ts, including HFs playing "double dip" scenarios, and hopefully some or most of the big pension funds and endowments have deleveraged to some degree by now.

Leftback said...
5:31 PM  

LB- I agree with your assessment, but am exploring ideas to justify the recent higher direct bidder participation, esp. at the long end.

It really does appear that we are pursuing the Japanese model lock, stock, and barrel. And while the US consumer doesn't have the propensity to save in the same way as the Japanese consumer of old, it is not unreasonable for said US consumer to pay off (or default upon) high rate debt.

The idea I'm pursuing is essentially the flows attending the combination of a reach for yield and simultaneous retiring of high-yield debt.

k1 said...
6:38 PM  

LB, so based on your analysis, banks pruchase UST to drive down the yield, while banks take decent profits, driving up the equity market. Sounds like another bubble in making.

econobserver said...
7:10 PM  

i was wondering your thoughts about this to add to the items that are hard to reconcile or maybe not priced in imo.

how can FED project 1.4 to 1.7 core PCE at the end of year with 9.5 to 9.7 unemployment? -same thing with BBG consensus 9.6% unemployment and only 1.3% year end core PCE. So basically market and FED are saying output gap will not close but inflation will stay where it is? can an argument of mispricing be made here? maybe that is the reason bond auctions are going well?

Deniz said...
7:19 PM  

econobserver: Many visitors here would posit that a large proportion of the entire rally in risk assets since March 2009 does indeed constitute a bubble.

Leftback said...
8:05 PM  

what take on YEN here, we are close to 2007 trend on weekly, talk on wires of possible intevention

peter said...
3:10 AM  

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