Morning Report – Bill Gross is short Bund vol, not Bunds 5/7/2015

Stocks are down small as we get a few mixed signals on the job market. Bonds and MBS are holding in there despite another big sell-off in the German Bund, which now yields almost 65 basis points – this is an increase of 57 basis points in about two weeks. Welcome to the new QE normal, where sovereign debt trades with the volatility of tech stocks.

Note that the volatility in the Bund has hurt Bill Gross, who considers it “the short of a lifetime.” Unfortunately, it looks like Bill sold options against the Bund, betting it would trade in a narrow range, and is now taking some gas on his position given the furious sell-off Euro sovereign debt. Welcome to the wonderful world of negative convexity, which is the bane of mortgage bankers globally.

The volatility in bonds has hurt the mortgage REITs, the latest of which is Annaly Capital, which missed yesterday. American Capital Agency struggled with the volatility as well. Interestingly, American Capital Agency was responsible for some of the outperformance in FHA / VA pricing at the end of the quarter. Ordinarily, they don’t buy Ginnie Mae TBAs as Fannies offer higher returns, but they viewed the Ginnie Mae sell off due to the change in MI was overdone, and took a position the other way. Mortgage REITs are generally most active in the secondary market for MBS, however they do dabble in TBAs and can affect loan pricing at the margin.

We have some mixed employment data this morning, with Challenger and Gray announced job cuts increasing 53% to 61,582 in April, which is the highest number in 3 years. About a third of these cuts are in the oil patch, as Schlumberger, Baker Hughes, and Halliburton all announced layoffs. The other big category is retail, where you are seeing layoffs as well. Ordinarily, you would expect lower energy prices to translate into higher spending at the mall, but it isn’t working out that way this time around. Blame broke Millennials who can’t find jobs, Gen-Xers who drew the candy cane card as they were hitting their peak earning years, and Baby Boomers who had to retire a little earlier than they had planned.

On the plus side, initial jobless claims hit 265,000 last week, which is still flirting with 15 year lows. One thing to keep in mind between the initial jobless claims report and Challenger: Challenger looks at announced job cuts. Often, those cuts end up not happening because the business turns around first.

The Bloomberg Consumer Comfort Index fell to 43.7 last week as consumers still fret about the state of the economy. An index reading of 50 is considered “normalcy.”

Janet Yellen ventured into Alan Greenspan territory yesterday when she remarked stock prices are still “quite high.” It didn’t have the effect on markets that Alan Greenspan’s “irrational exuberance” comments did, as stocks largely ignored the warning. Memo to central bankers: You don’t have a bubble in stocks. You have a bubble in sovereign debt

19 Responses

  1. Fristing!

    Sheila Bair is taking over as president of Washington College here in Maryland:

    Washington College on Wednesday named a former chair of the Federal Deposit Insurance Corporation to be the college’s 28th president.

    Sheila C. Bair, 61, will take over the job as president of the small liberal arts college in Chestertown in August. She will be the first woman president of the college, which was founded in 1782.

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    • Is Radley Balko Fox Butterfield?

      About half as many cops are killed on the job today as in 1968, despite the fact that there are significantly more cops on the street.

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      • This kind of melding of stats always irritates me:

        Today, 66 percent of the country thinks the court is either too conservative or middle of the road.

        So deceptive. He doesn’t provide a breakdown, but for the sake of argument lets assume that 33% think it is too conservative, 33% think it is middle of the road, and 33% think it is too liberal. That would make his claim true. But it would also make the claim that “66 percent of the country thinks the court is either too liberal or middle of the road” equally true. So of what use is the claim?

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        • I agree with this:

          They reduce very real questions about injustice, race, and systematic oppression to blunt political analysis. This is typical of punditry in general, and it’s particularly true as election season heats up. But it’s particularly callous with these issues because of what’s at stake.

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        • jnc:

          Balko’s story about Antonio Morgan is compelling, but I wonder how much it really has to do with federal law enforcement. It sounds to me like a local policing issue unrelated to any kind of criminal justice reform that Hillary or any other presidential candidate might propose.

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  2. WTF is Yellen bitching about given QE? Is this just kabuki?

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  3. Heh, “Dude can blow me.” Will that sentiment get me into Smith?

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  4. Except to the extent that local policing is being militarized as part of the war on drugs, and that process itself affects the character of local policing.

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    • jnc:

      Except to the extent that local policing is being militarized as part of the war on drugs, and that process itself affects the character of local policing.

      True, although Morgan’s story didn’t seem to have anything to do with drugs or militarization of the police. But in any event, I guess the one criminal justice reform that could help is legalizing drugs, or at least some of them. I doubt Hillary or anyone else (except maybe Rand Paul?) is going to propose that.

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      • Decriminalize drugs and eliminate folding money and street crime will curve down to a limit approximating zero.

        I joined JNC and NoVA yesterday at PL to point out who the actual criminals were in Garland and I think some of them actually understood our repeated attempts at explanation. Glass half full.

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        • Was PL really taking up the blame the cartoonists theme?

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        • Not really. There were only two out of several, as I recall, but one of them repeated himself interminably.

          The other of the two made the analogy to kicking a hornet’s nest or a beehive or some such.

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  5. Sigh. Nothing changes.

    “McConnell took that unusual step of shutting down the amendment process to protect Democrats from having to vote on Republican ideas.”

    http://www.washingtonpost.com/politics/mcconnell-on-verge-of-clearing-big-hurdle-on-iran-review-legislation/2015/05/07/a27455be-f42c-11e4-b2f3-af5479e6bbdd_story.html?hpid=z1

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  6. “he move was a reversal of the open amendment process Republican leadership pledged to bring to the Senate.

    McConnell said Thursday that he would have preferred that amendments be added to the bill, but that it might have invited a presidential veto.

    “If we didn’t face the threats of filibusters, or the blocking of amendments, or the specter of presidential vetoes, this bill would be a heck of a lot stronger. I assure you,: he said. “But the truth is, we do. That’s the frustrating reality.””

    failure theater.

    http://thehill.com/blogs/floor-action/senate/241355-senate-votes-to-approve-Iran-review-bill

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  7. “McConnell said Thursday that he would have preferred that amendments be added to the bill, but that it might have invited a presidential veto.”

    Then don’t do Obama’s job for him.

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  8. The posters were, but not Greg himself.

    Like

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