Treasury Closing Summary (January 17):
Yields backed up sharply on Thursday after an initial round of strong data colluded with a bullish stock market and a report that Fed members may be starting to get twitchy over asset bubbles. Though this mostly regurgitated recent Fedspeak to that effect, the result was that same with yields surging as optimistism in Europe hit Bunds and compounded the moves. Jobless claims plunged and housing starts surged, though the Philly Fed index tanked.
Equities nudged after initial jobless claims plunged 37k, while housing starts surged 12.1%, adding to the positive tone, though the Philly Fed later plunged to -5.8 in Jan, well below median 7.0 from 4.6 in Dec. Among the caveats to the banner earnings of JPM and Goldman yesterday was the 63% plunge in BofA earnings given foreclosure settlements, knocking the bank's shares lower. On the other hand Blackrock shares surged over 3% after profits climbed 24%. Citi profits were hit by a $2 bln charge and Intel is due after the close. China is on the radar screen, however, ahead of a batch of key monthly economic reports on Friday. In M&A, AT&T is reportedly considering purchasing a European telecoms company. UnitedHealthCare fell after earnings sank 1.1%.
Yields shot up in a couple of stages. First ahead of the opening bell, there was a Business News wire report that the Fed is getting increasingly twitchy about asset bubbles given the QE program, which may have cooled off some more bond bulls overnight. Then firm claims and housing data added to sell-off, followed by gains on stocks despite the plunge on Philly Fed. The 2-year yield even stretched from 0.25% back over 0.26%. The T-note yield shot higher from 1.80% European lows to session highs just under 1.89. 2s-10s remained steep at +161 bp.
In options jockeying on put spreads seemed to be the latest fad, as one shop sold "10k in Feb 130/131 put spreads" into the slump on underlying 10-year futures. Another bought "10k in Apr 126/127 put spreads," however, looking for more downside protection. Seems the trades were not related. Mar 10-year futures plunged 16-ticks to the 131-25 area, compared to 132-155 to 131-24 range. In euro$ interest rate options, there were reports of "serious liquidation" of upside bets circulating, amid sales of 15k in Jun 2013 92/93 call spreads vs 90 puts based on a reputed long position of some 25k. On the other hand, there was also a purchase of 7k in Sep 2013 call spreads vs sale of 87 puts. The Mar 2013 contract fell a tick lower, while the deferreds sank 1-4 ticks on the session.
BoJ may scrap its 0.1% interest rate floor and potentially pledge open-ended asset purchases until inflation reaches 2% at next week's meeting, according to "sources" cited on Reuters. Though a variant of previous plans floated, it has renewed focus on Japan's reflation kick and would come on top of expected plans to top up asset purchases by another Y10 tln. Yet USD-JPY jumped to test Y90.0 again before stalling after marking fresh trend highs of Y89.91.
Fed dove Lockhart said that bond buying will likely need to continue beyond mid-2013, while Dallas Fed hawk Fisher warned that QE is not infinite. NY Fed Ops purchased $3.357 bln in intermediate notes from Feb 2020 - Nov 2022, which may have slowed the carnage. USD index rebounded on solid data to test 80.0 before easing back from highs. NYMEX crude clambered over $95 bbl on the Algerian kidnapping crisis and talk of a Goldman $150 target.
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