Credit Suisse's head of US rates, Carl Lantz, is a usual suspect when it comes to dispensing bond market commentary. What we did not expect him to do, is also analyze last night's off-cycle political results. He does both in the note below.
From Credit Suisse's Carl Lantz
Last night's off-off-cycle election results are not quite so easy to draw clear implications from. The media is generally painting the results as an embrace of moderation and confirmation of a generally damaged republican brand.
I think that characterization is more or less true but we had a limited number of elections and each had its own "special factors" at play.
A moderate republican - Chris Christie - won the governorship in New Jersey and a moderate (relative to his competitor at least) democrat won in Virginia. Interestingly however the Terry McAuliffe victory in Virginia was much narrower than expected versus his hard-right competitor and the results may have gone the other way if the libertarian third-party candidate had note siphoned off circa 7% of the vote.
Back to New Jersey, the results likely would have been tighter - but still a Christie victory had the Governor not moved the Senate election to avoid the Democratic turnout associated with Dem Corey Booker's big win last month.
Of much interest was the special primary in Alabama for the US House. A moderate republican (Bradley Byrne) backed by the "establishment" and business overcame a strong challenge from a Tea Party insurgent (Dean Young). The general election, to be held later this year will not be of consequence in the heavily republican district. Had Young been victorious it would have added to the already substantial numbers of Tea Party supporters in the house.
Finally there is NYC. The first Democrat - Bill DeBlasio - was elected mayor since 1989 in a town that is 6-1 democratics. In the wake of the crime-ridden 80s, New Yorkers turned to republicans and stayed there post 9/11. Over time Bloomberg of course became less Republican, in name (formally going independent) and policy, but DeBlasio will be a big shift. Now he goes to Albany to seek approval for a tax increase to fund universal pre-K among other progressive policies.
Perhaps this is the start of the Democrat version of the Tea Party - both are reactions in some measure to widening income inequality and a frustration with politics as usual. The proposed solutions couldn't be more different, however, and it seems that despite talk of a victory for moderates the country remains very polarized.
Enough politics. On to the markets.
The rates market continues to deliver very little "net" volatility as we move into the second month of the fourth quarter. Despite the recent back-up we are not even back to the levels seen before the October 17th debt deal. Gamma has been cheap enough that well timed purchases and delta hedges have been profitable. But no clear trend is in place. Just when it felt as if the 2.47-2.50 level would give way to still lower yields the data came in significantly better than expected (especially the survey data).
The caveat here is that the survey data have not tracked the "hard data" terribly well in this cycle. Its hard to see the economy falling down to new lows on our data surprise index {NXTW MDSICSUS Index GP <GO>}- or seeing a sharp move to payroll numbers outside the continued range of 120-220 on payrolls that has held about 80% of the time over the past three years.
Given the price action and the non-manufacturing ISM employment component we are inclined to think the market is set up for a stronger than consensus number on Friday. If we cheapen much more, the risks will become more cleary asymmetric.
For now we prefer steepeners into the refunding auctions next week - announcement at 8:30AM today. We wrote this up on Monday and have seen interest in the trade which has moved about 1.5bps in our favor. Steepening during the sell-off yesterday was a reasonable indication that supply is starting to weigh as generally speaking 7s and 10s lead moves to higher yields.