Friday, April 17, 2015

Greece Induced Risk-Off with Oil Impacted Treasury Curve Steepening

We start Friday in ‘risk-off’ mode.  Attention paid Greece and their potential default is unsettling and brings European equity lower for a second day.  German DAX has come 5% lower since the April 13 high, capping a 32% advance from the January 6th low.  This has prompted lower yields in both Germany and elsewhere while Greece debt yields push out beyond 2.5 year highs. 

Treasury yields are lower following a circular trade yesterday.  Treasury yields started lower, with 10’s at 1.87% and pushing out to 1.92% before returning to 1.87%.  10yr yield is 1.85% now and the Treasury 5-30 yield curve is steady at 1.27%, having widened by 5 bps yesterday to a new 4 month wide. 

As we had discussed in a February 3 note and elsewhere, the recovering oil prices might be expected to weigh on the long end of the market, all else equal, as there were a number of traders positioned to benefit from lower oil price having a deflationary impact on long rates (curve flattening trades).  And although Treasuries being higher today appears to be following risk-off characteristics, the steepening of the yield curve does seem to be attributable to recovering oil prices. 

Risk-off behavior is also being seen in U.S. domestic equities.  There is currently a bearish reverse pattern that is worthy of attention. Yesterday’s attempt to push forward was unsuccessful and the bullish contingent is now more susceptible to the far-away pull from Greece conditions.  

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