What do swaps say about tendency for bonds now that the CPI has restarted the will-they/wont-they rate cut debate? Spreads haven't actually moved much at all off their lows, a sign (for a whole bunch of reasons including collateral) that fundamentals haven't changed.

One reason why rates had been so stable before the knee-jerk to the CPI can be seen in swap spreads. After breaking massively lower before and then during last year's bond rally, spreads decompressed in Jan as rates backed up. That stalled in Feb just when rates trended sideways,

There is a high degree of correlation btw dealers stuck w/USTs because of lower collateral flow (not too many USTs) and other critical financial indications like swap spreads. This makes intuitive sense, too.

Swaps are first a synthetic bond only far more balance sheet…

Rising dealer inventories of USTs is a defensive mechanism because there are often painful costs involved when collateral doesn't flow, and I don't mean defaults It can wreck profitability.

But being defensive also has costs in terms of balance sheet efficiency.

The evidence indicates dealers aren't stuck with USTs because there are too many of them (again, see: prices) rather because not enough of them flow like they used to.

Collateral multiplier slows, dlrs would have to make up for it by holding higher inventories. When they can.

The change in dealer balance sheet behavior is more complex, but part of it can be attributed to US Treasuries. Mainstream thought (of course) continues to cite 'too many' Treasuries which is easily debunked - just look at a chart of UST prices vs. dealer holdings.

Dealer…

Re: repo fails, here's the weird part: before 2020, qtr ends were about the middle week of the final month each qtr not final week itself. That was traditionally where the funding bottlenecks would hit (Bear, Lehman, Sept '19, etc). Something has changed the past few years.

Something is happening on dealer balance sheets and as it pertains to collateral flow. There was another jump in repo fails and once again at quarter end. In fact, past two years have seen that more frequently, esp. those quarters with Euro$ tightening.

For all the huge uproar over the US CPI, that won't tell you much or anything the direction for consumer prices. Producer prices are a far better forward indicator for 'inflation', yet yesterday's PPI slipped by as if it didn't happen. Wonder why.

Gee, wonder why hardly anyone noticed the US PPI as opposed to the CPI dominance. Doesn't fit the inflation-is-raging-because-US-economy-is-still-red-hot narrative.

Those transitory bumps in the PPI (and CPI) are nothing more than oil supply issues, not 'structural inflation.'

When China's economy suffers, they buy less oil from global mkts which normally would soften prices (if not for non-economic supply factors). IOW, China's economic difficulties have a more direct spillover into, say, 'inflation' than you might realize.

youtu.be/05T2LwiblyI

Most people's response to the downturn in China is, who cares? Sorry for them, but it doesn't seem to have any impact on everyone else.

#greatmigration

youtu.be/05T2LwiblyI

China's bad numbers keep coming. Big drop in consumer prices. More declines in producer prices. Outsized contraction in exports. Record low bank lending growth. All of these are having on impact on the rest of the world whether you realize it or not.

youtu.be/05T2LwiblyI

Pay more attention to PPIs than CPIs for what direction CPIs are ultimately going to take. It doesn't really matter which one; China's, Europe's, America's. More information in them about consumer price pressures than every central bank statement, study, speech, minute, etc.

Chinese producer prices will tell you more about US consumer price pressures than anything. Not that Chinese producers are directly influencing US, China PPI shows leading global factors which determine direction for global price behavior.

Good news on prices, bad news is why.

Same planet, different worlds?

Consumer prices in US seem to be stuck too high while China just dropped bigtime; 3rd biggest monthly decline in 20 years.

Good news is that prices are driven by global factors not local (tell Jay). Bad news is those are more like China.

Big concern Mar CPI wasn't that it was hot, didn't really change enough from Feb. Growing fear is consumer prices are stuck, whatever disinflation there might be already happened, now price changes are structurally higher from here on.

Any of this true?

youtu.be/KpM6eIw8uoI…

Korea's won is also just shy of a multi-year low. The dollar is targeting the North Asian currencies. Has nothing to do w/supposed Fed rate cuts being postponed or canceled (see: gold). Rising $ is trouble in the making.

youtu.be/cFdsy7l96ho

Not only CNY, JPY is running up against the same problems. On the one side, the govt has threatened to intervene if it falls under 152. Yet, JPY keeps getting closer because like CNY it 'wants' to go lower.

youtu.be/RS5HzBkzds4

CNY was still just a few pips from the 2% daily limit again for the third day in a row. Neither side seems willing to budge: PBOC sticking with its fix; market continuing to push yuan lower.

Who blinks first?

youtu.be/RS5HzBkzds4