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26 February 2021
Video commentary for February 25th 2021
Eoin Treacy’s view
A link to today’s video commentary is posted in the Subscriber’s Area.
Some of the topics discussed include: Treasury yields spike higher, stcocks and bonds pause, oil eases, gold weak, bitcoin steady yield curve steepening.
Treasury Yields Surge Past 1.6%, Sounding Alarm for Risk Assets
This article from Bloomberg may be of interest. Here is a section:
The 5-year note is of particular interest to many in the $21 trillion Treasuries market. Earlier this week, tepid demand in an auction of five-year notes brought into focus this key part of the curve, which also reflects medium-term expectations for Fed policy. Then on Thursday, a measure of demand for a $62 billion auction of 7-year Treasury notes came in at a record low.
The rout comes as investors continue to reprice expectations for Fed hikes as the vaccine rollout and the prospect of additional stimulus foster a rosier outlook for the economy. Yields on 2- and 5-year yields are more influenced by the starting point and speed of normalization, said Bank of America Corp. rates strategist Ralph Axel.
“Everything that we see keeps pushing us into sooner, faster, more in terms of removing accommodation,” Axel said.
The surge in yields is hurting riskier assets. Emerging-market currencies such as the South African rand and Mexican peso sold off sharply against the dollar, and the S&P 500 Index dropped as much as 2.6%.
In Europe, peripheral countries have led a bond sell-off, with Italy’s 10-year yield spread over Germany climbing back above 100 basis points. Core debt wasn’t spared, with yields on France’s benchmark debt turning positive for the first time since June.
Eoin Treacy’s view
The 5-year Treasury best approximates the average duration of the US debt market so it tends to attract a lot of notice from bond traders. The surge in yields is being driven by two factors. The first is investors are increasingly willing to price in a quick recovery. The second is the indifference of the Fed to higher rates.
The Fed May Need to Head Off a Money-Market Mess
This article by Bill Dudley may be of interest to subscribers. Here is a section:
What can the Fed do? For one, at their next policy-making meeting in mid-March, officials could slightly bump up the interest rates the central bank pays on bank reserves (currently 0.10%) and on its borrowings in the repo market (currently zero). A slightly higher floor on such rates might help prevent other short-term rates, such as yields on Treasury bills, from going negative. There’s precedent for such a move: The Fed has made technical adjustments to these rates before in order to ensure that the federal funds rate stays within the Fed’s target range.
Beyond that, the Fed should extend its temporary exemption of bank reserves and Treasury securities from leverage-ratio calculations (the initial exemption, granted last spring, is set to expire in March). I would even recommend going further and exempting bank reserves permanently. This would help solve a problem that arises when the Fed buys securities to stimulate the economy: Its purchases cause reserves to increase, bringing banks closer to the point where the leverage ratio requirement binds and forces them to curtail lending. When this happens, it undermines the Fed’s stimulus efforts. To ensure that the exemption wouldn’t reduce the amount of capital required to be held by banks, the leverage ratio and other capital requirements could be adjusted upwards.
Granted, the Fed might have a hard time selling such a move to other financial regulators, which don’t share its monetary policy mandate. But it would be the right thing to do, eliminating the inherent conflict between the Fed’s quantitative easing and bank leverage limits. Under the current regime, the Fed is adding accommodation with one hand, and taking it away with the other. That’s a strange way of doing business.
Eoin Treacy’s view
The repo market is more than capable of sparking unwelcome volatility and the conditions for negative money market rates are growing. Some form of action will be required. Doing nothing will only exacerbate the problem. I suspect the Fed would much prefer removing inhibitions on bank liquidity than any form of interest rate hike regardless of how technical it would be.
This helps to highlight the Fed has challenges at both the long and short end of the curves. The yield curve spread continues to expand. The more sensitive 10-year – 3-month spread has jumped by almost 200 basis points in the last 18 months.
“Real world” test of Pfizer COVID-19 vaccine in Israel determines effectiveness in preventing illness
This article from the Associated Press may be of interest to subscribers. Here is a section:
A real-world test of Pfizer‘s COVID-19 vaccine in more than half a million people confirms that it’s very effective at preventing serious illness or death, even after one dose.
Wednesday’s published results, from a mass vaccination campaign in Israel, give strong reassurance that the benefits seen in smaller, limited testing persisted when the vaccine was used much more widely in a general population with various ages and health conditions.
The vaccine was 92% effective at preventing severe disease after two shots and 62% after one. Its estimated effectiveness for preventing death was 72% two to three weeks after the first shot, a rate that may improve as immunity builds over time.
It seemed as effective in folks over 70 as in younger people.
“This is immensely reassuring … better than I would have guessed,” said the Mayo Clinic’s Dr. Gregory Poland.
Vanderbilt University’s Dr. Buddy Creech agreed: “Even after one dose we can see very high effectiveness in prevention of death,” he said.
Eoin Treacy’s view
This is very encouraging news for anyone worried that the pandemic is going to last indefinitely. There are a handful of variants currently spreading and each appears to be more transmissible than the original strain of COVID-19.
Some of the vaccines have not proven to be effective at managing these threats. However, the big step in calming consumers has been achieved. If a vaccine can be created to deal with the first one, a booster can be delivered to the deal with the next. That’s true in addition to the fact that most young people have little to worry about anyway.
Eoin’s personal portfolio – stop triggered on hedge position
Eoin Treacy’s view
One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change.
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