Parallels

October 1, 2023 – Weekly Comment

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Just a few charts and thoughts this week.

Treasury yields made new highs, led by longer maturities.  On Thursday, the 20yr poked just above 5% but came back down to end the week at 4.90%.  Similarly, the 30yr popped above 4.80% but ended near 4.70%, up 19 bps on the week. Using the w/I from last week, the 2yr note ended down 2 bps  to 5.048%. 

What was interesting about Thursday is that even though bonds were posting new high yields (high since 2011), SPX remained above Wednesday’s low, so there was a small divergence.  On the week SPX was only down 0.7% to 4288.  The fact that Congress was able to kick the can a short distance down the road with temporary legislation to keep the government running may be viewed favorably, but overall price action in equities remains weak, with a poor close on Friday. 

Below is a chart comparing general patterns from 2007 with now.  In March of 2007 Bear Stearns revealed problems with their mortgage funds; they were essentially marked down to zero.  In March of this year SVB and a couple of other regional banks were marked down to zero.  Stocks sold off in both events but soon recovered early March highs.

In July of 2007, SPX suffered a sharp drop.  CNN Money attributed the move to tough conditions in credit markets.  This year SPX put in a recent top at the end of July.  It has been a much more gradual decline since then (as compared to 2007) but underlying conditions are similarly suggestive of a much more difficult environment for companies to roll debt.  Spreads have not really blown up, but I would argue that the surge in long bond implied volatility to the highest levels since March indicates that broader problems in credit markets are around the corner. (I marked USZ vol just above 15% on Friday; USZ3 114^ settled 5’20). NOTE: The MOVE index does not give the same warning, because it is comprised of volatility levels across the treasury curve.  In fact the MOVE has posted successively lower highs in late May, July, August and Sept.  (chart at very bottom).

The first chart doesn’t show it, but the ultimate top in 2007 came on October 11.  Surprisingly, after the sharp drop in July, the index came back to make a new high…and then began a painful slide.  You’ll notice that in 2007 the swoon in mid-August did not quite take out the March low.  That low was taken out in January.  This year the March low was 3809.  With SPX ending the week at 4288, we’ll need a decline of another 11% to reach the March low. 

It felt like the big move this week was the curve.  However, the chart of 2/30 below doesn’t really signal a momentous change in trend, even though the spread gained over 20 bps.  Rallies in the curve are typically associated with Fed easing or the strong expectation of a looser central bank.

This time, the Fed is trying to project a harder line in the fight against a possible resurgence in inflation expectations.  It’s not typically the case that bond yields rise aggressively in the context of monetary restraint, but that’s where we are now, and most bets are centered around 1) how long before something breaks 2) how has the perception of the Fed put changed?  Will the Fed ease rapidly or grudgingly? 

One last chart is a long term $/yen.  The 150 level was tested this week.  The 10y JGB hasn’t been this high in yield since 2013 (76 bps).  The 20y JGB ended at 1.48% and the 30y at 1.73%, also both new highs.  Higher costs for capital globally and a stronger USD don’t bode well for long-dated US assets.

Chart below is MOVE vs US vol

	9/22/2023	9/29/2023	chg
UST 2Y	506.7	504.8	-1.9
UST 5Y	456.7	460.5	3.8
UST 10Y	443.6	457.1	13.5
UST 30Y	451.8	470.8	19.0
GERM 2Y	325.9	320.3	-5.6
GERM 10Y	273.9	283.9	10.0
JPN 20Y	144.9	147.7	2.8
CHINA 10Y	269.2	268.1	-1.1
SOFR Z3/Z4	-82.5	-86.0	-3.5
SOFR Z4/Z5	-68.0	-63.5	4.5
SOFR Z5/Z6	-8.5	-1.0	7.5
EUR	106.45	105.73	-0.72
CRUDE (CLX3)	90.03	90.79	0.76
SPX	4320.06	4288.05	-32.01	-0.7%
VIX	17.22	17.52	0.30

Capitulation in reds

September 29, 2023

–Large reversals yesterday.  Back end of the curve steepening.  2/10 high of the year is around -40 and now around -47 (getting close) though that’s partially due to new 2y and the roll (i.e. the old 2y ended at 5.125 at futures close and the just-auctioned 2y is 5.07, making 2/10 seem a lot steeper).  However, look at something like SFRZ4/SFRZ7 (red/gold dec).  That spread jumped 9 bps today to -50, so the move to a steeper curve is real.  SFRZ4 settled 9538.5 (+10) and SFRZ7 settled 9588.5 (+1).  I have attached a chart; Z4/Z7 needs a few closes above -40 to indicate a change in trend.

Below is red Dec/gold Dec SFRZ4/Z7

–In addition, SFRZ4 contract staged an impressive reversal.  Wednesday featured a new contract low settle at 9528.5.  Thursday had an outside range and a close near the high at 9538.5.  This price action suggests that shorts should be exited.  Of course, new info could change that, but for now selling pressure has been shut off, and vol declined.  Consider long call spreads on this part of the curve.  USZ3 settled exactly unchanged at 113-16.  USX3 at-the-money 113.5 calls and puts each dropped 10/64s from 1’63 to 1’53, so the straddle went from 3’62 to 3’42.  This, after the 30y yield had surged to over 4.80% and 20y to just over 5% in the morning. 30y ended 4.727%.

–News today includes PCE prices expected 3.5% yoy from 3.3 last.  Core expected to decline to 3.9% from 4.2.  Chicago PMI expected 47.6 from 48.7.  ISM Mfg on Monday.  The gov’t shutdown will likely delay Friday’s NFP release.  

–I am surprised that since August CLX3 has traded from 79 to 92, yet gasoline prices at the pump have barely changed, and have even declined slightly, at least in the Chicago area.  My bias is that gas prices are a constant signal influencing consumer confidence and behavior.  I thought the BBG clip below summarizing Powell’s comments yesterday were somewhat amusing, given that Powell has repeatedly said the Fed isn’t quite sure how things will evolve and why some economic data have been difficult to understand.

(Bloomberg) — The Federal Reserve’s ability to influence
the economy depends on whether “people understand what we are
saying,” Chair Jerome Powell said, highlighting the importance
of work done by economic educators. 
When Fed officials publish their projections for interest
rates and the economy, “one of our goals is to influence
spending and investment decisions today and in the months
ahead,” Powell said in comments prepared for a town hall event
with teachers in Washington Thursday.
“That will only be the case if people understand what we
are saying and what it means for their own finances.”
The Fed chair didn’t comment on his outlook for rates or

the economy. 

–I’ll tell you what the trading public DID understand: that a 50 bp jump in the 2024 dot plot signals continued restraint and diminished value of forward cash flows.  

New low settles in SOFR contracts

Sept 28, 2023

–Rate futures continue to trade extremely weak, with most near SFR contracts closing at new low settles.  For example, SFRU4 settled over 5% for the first time, at 9499 or 5.01%, down 6 on the day.  To reach the current SFRZ3 price would require another 47.5 of roll-down.  SFRU4 9500 straddle settled 95.0 with 352 days to go, breakevens near 4% and 6%. However, the 6% strike 9400 put settled 9.25 and the 4% strike 9600 call settled 22.5.

–There were a couple of new notable downside trades: a seller of 100k FFX3 at 9462.5 (settled 9461.5, open interest +71k), and a buyer of 45k SFRF4 9425/9400p 1×2 for 0.5 (settled there, 4.5, 2.0, vs SFRH4 9456.5).  A hike on Nov 1 would obviously be an instant payout to the FFX seller as the contract would settle around 9443.  There would need to be perceptions of another Fed move to 5.75-6.0% for the Jan 1×2.  By the way, the March expiration 9425/9400p 1×2 settled at a credit of 0.75, 7.25/4.0.  

–Nov Crude closed at a new high 93.68, up 3.29 on the day.  Treasury yields also continue to rise, with the ten year yield up 6.4 bps to 4.624% and 30s up 3.3 bps to 4.73%.  Implied vol firmed to a new high in US as shown on the attached chart, but it’s not quite breaking through old highs in TY.  Somewhat interesting to note that on Friday, SFRZ3 9450 straddle settled 16.5 vs 9453, and yesterday against 9451.5 that straddle settled 19.5.  Yesterday SFRZ3 9475c settled 3.5, which was up 0.75 on the day with the contract -1.5!   Maybe it was the large FFX sale that re-focused traders on the idea that the Fed might not be done.  Maybe it was Kashkari talking about one more hike.  And maybe it’s just that the world seems a little unhinged and financial stress is piling up.  

–Today we have revisions to GDP National Accounts.  Jobless Claims and the 7 year auction.  Goolsbee comments at 9.  Powell has a town hall meeting with educators at 4.  Tomorrow PCE prices yoy expected 3.5% from 3.3 last.

Where there’s smoke

September 27, 2023

–Stocks tumbled yesterday with SPX -1.5% and Nasdaq Comp -1.6% (though there’s a small bounce this morning).  30y bond yield continues to lead rates higher, ending 4.687% at futures settle, up 4.2 on the day.  Shorter maturities unchanged to up slightly.  New recent highs in 2/10 at -57 bps and 5/30 at +7.2.  Fed Funds: November FFX3 settled 9462.5, 5.375% and FFF4 9456.5 or 5.435% vs Fed Effective 5.33.  Market leans toward the idea of the Fed standing pat at the Nov 1 FOMC; Jan isn’t even at 50/50 for the Dec 13 meeting. 

–In SOFR options there are more targeted easing plays focused on SFRH4.  For example a buyer of 30k SFRF4 9462.5/9468.75/9481.25/9487.5c condor for 1.  Max value 12.5 between middle strikes, with underlying SFRH4 near the lower strike at 9461.  Similar idea +20k SFRH4 9475/9487.5/9500/9512.5 c condor for 1.  Max value 12.5 between middle strikes.  This one requires an actual ease, but not the prospect of emergency cuts (which could conceivably take us through the top strike).  Additionally, there is continued accumulation of SFRM4 9600/9700c spread 7.0, now up to about 150k total position.  Settled 12.25 and 5.25 ref 9479.  This trade requires easing that is more aggressive.  That’s what it’s all about now: when the easing starts, is it measured, or an emergency?  The fiscal bullets are now spent, so it’s all going to be on Powell’s shoulders when the embers left in the ashtray are knocked over by the cat, and catch on the tablecloth, and the conflagration starts.  And that’s more along the lines of the buy of 10k FVX 108 calls for 3.0.  About 65 bps away, with the current cash 5y 4.625%.  Like putting out fire…with gasoline.

–Today’s news includes Durables and the 5y auction.  One last tidbit:  CLX3 is 91.84 as of this writing, close to the high tick of the month at 92.43.  On the 4^th of July it was 70.  As Dec Copper makes new lows.

What happened to OMO?

September 26, 2023

–Now it’s just fear.  Or at least a deep sense of unease.  Yesterday, the thirty year bond led yields higher, ending up 13.7 bps at 4.655%.  Vol exploded.  For example, on Friday I marked the atm USZ 117^ at 4’48 ref 116-29.  Yesterday the 115^ ref 114-27 settled 5’26.  Even having taken weekend time value out of Friday’s mark, vol went from 12.5 to 14.6.  The ratio of DV01 for FVZ to USZ is about 3.1.  Yesterday the ratio of FVZ to USZ vol was over 3.0 (4.8/14.6).  It is quite rare to see the vol ratio at nearly the same as DV01 ratio and it suggests that the bond sell-off may need to take a breather.  In any case, liquidity will likely suffer in the near term.  The fear I refer to is mostly in fixed income for now, however, VIX tested 18 and still closed with a gain at 17.49.  

–Curve bear steepened.  Since the Sept 20 FOMC, the 2/10 spread has gone from -77 to -59.  5/30 is now positive 4 bps.  On the last day of August, the 30y yield was 4.21%; it has surged 44 bps in less than a month.

–China’s property woes continue to dominate headlines.  DXY is at a new recent high near 106 and $/yen near 149.  Financial conditions in the US are tightening quickly. At the end of 2018 the Fed made its last hike in December (to 2.25-2.5%), and then quickly was forced to pivot to ease in 2019.  This isn’t that Fed.  However, market conditions have a way of overwhelming the best laid plans.  

–I never really discuss the political landscape, but….gold bars?  Senator Menendez, you accepted gold as a bribe?  I don’t care what party you’re from, that offense, if proven, should mean jail.  The tepid response from our elected officials underscores the disgust that the general population holds for our current political infrastructure.  Or maybe a better word is distrust. I was using ‘disgust’ for myself.  In any case, shoveling billions of taxpayer funds out the door to special interests for personal gain might even be a contributing factor for bond market weakness.  Is that a stretch?

–Today’s news includes Philly non-mfg survey and New Home sales expected 698k from 714k rate last.

The Marlboro Man

September 24, 2023 – Weekly Comment
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In the mid-1950’s Philip Morris gave Chicago advertising upstart Leo Burnett an assignment:  Sell Marlboro cigarettes to men.  At the time, the filtered pinkish end of the brand gave it more of a feminine aesthetic.  The creative agents at Burnett immediately decided to focus on the most masculine of images; the cowboy.  They tweaked the package design, ran full page ads, and as described in a documentary, “The Marlboro Man was able to take a product that was considered feminine because of that filter, and suddenly make it seem hardcore. They completely flipped the demographics…”  Within a month Marlboro became the top-selling filtered cigarette in New York. 

Namesake Leo Burnett said it was one of the greatest campaigns he’d ever seen, “I just jumped out of my chair!”  The brand continued to grow with the ‘Marlboro Country’ campaign in the 1960s.  The Burnett team thought some of the new cowboy ads looked a bit contrived, so they went out west and starting shooting spots with REAL cowboys.  They presented the concept to a research company who warned, “No one can identify with cowboys, if you run this, you’ll run the brand out of business.”  The consultants left the room and Jack Landry of Philip Morris said, “Run it”.  The campaign worked.  Sometimes you’ve got to go with your gut.  (And have a strong sense of your core customer).

The documentary is a fantastic slice of old Chicago and classic advertising.  Here’s a link:

The Federal Reserve has been involved in a crusade to bring inflation down to its 2% target.  Make no mistake, “forward guidance” is an ad campaign.  Where Powell has become most successful is in rounding up Federal Reserve members to commit to the same message.  And that’s the tagline from the 2022 Jackson Hole meeting: “… we must keep at it until the job is done.” 

The Fed knows that bankruptcies have been increasing, that loan delinquencies are moving up, that M2 growth is at an unprecedented level of contraction, that JOLTs on a yoy basis have declined at a 22% rate, only surpassed briefly by the COVID plunge and the fall in 2008 (chart below).  If I know it, the Fed knows it.  There are many pundits, critical of the Fed, who always start with, “What the Fed doesn’t understand is…” 

JOLTS yoy % change

It’s clear that the Fed has gotten economic projections wrong, and undoubtedly, their current forecasts are likely to miss the mark.  But rather than me giving a half-assed opinion on what the Fed has missed, I think I’ll focus on not missing what the Fed is telling me:  The trend for long-dated assets is now lower.  The 50 bp increase in the FF forecast from June’s 4.6% to last week’s 5.1% is a crystal clear endorsement of the “higher for longer” advertisement.  Longer dated assets had pinned hopes on a Fed flip to easing. After the June FOMC, the red SOFR pack was around 9625 or 3.75%.  On Friday the reds ended at 9570 or 4.3%.  Post-June FOMC 10s were 3.75%.  On Thursday the yield poked above 4.5% and ended 4.436%, up over 11 bps on the week and nearly ¾% higher than late June.   

I’m not saying that stocks go straight down, or that something can’t break (hard) and throw the entire macro environment for a loop.  Many trades in US rates have the theme of “forced easing, when does it happen and how hard could it be?”   For example, there was a buyer last week of 40k SFRF4 9475/9525/9575c fly for 3.5 to 3.75.  With current EFFR of 5.33% it’s clear that this trade requires strong expectations of easing, starting at the end of 2023 or in the beginning of the new year. (Jan options expire Jan 12, with SFRH4 underlying, well before the Jan 31 FOMC). The middle strike is 4.75%.  Again, I would mention something like SFRZ3 9475/9550c 1×2 for 0.25 credit to buy the lower strike.  A strong perception of ease starting at the Jan 31 FOMC or before would put this trade in play.  However, the Fed’s muted response to the regional banking problems of March make it clear that the bar for easing is now quite a bit higher than previously thought. 

Credit: Game of Trades

The Fed is using its tools to slow the economy and create tighter financial conditions, which includes lower equity prices.  The terminal FF rate has perhaps already been achieved, or will be with one more hike.  But the tool that is never mentioned is patience.  Let the weight of high short-term rates work through the system.  Funding rates above all measures of inflation will create a lot of angst for companies that need to roll debt in the coming year. Some won’t make it. The ‘real’ rate as expressed by the ten-year inflation-indexed note is at its highest level since 2009, ending the week at 2.06%.  Additionally, banking issues continue.  Year-over-year bank credit (chart below) resembles M2.  Take a look at a chart like Bank of America (BAC).  It’s near the low of the year and is essentially equal to the level associated with SVB in March.  BAC looks about the worst, but KRE (US regional bank ETF) and BKX (KBW Nasdaq money-center bank index) are both on recent lows and below the original plunge levels of mid-March.

   Yoy growth in bank credit

This week includes auctions of 2, 5 and 7 year notes.  Should sail through as only $16b in new cash is being raised.  The week (and month) ends with PCE prices, expected 3.5% yoy vs 3.3% last, with yoy Core 3.9% vs 4.2% last.

There was a powerful scene in the Chicago documentary featuring a black woman, Carol H Williams.  Hired in 1969 in an obviously tough environment, she rose to creative director and vice president in six years. “I loved Burnett from the first time I walked in there.”

“I was not afraid to take the shot and I took the shot”

Maybe the Fed (or the entire country) could use her to head up communications!

OTHER THOUGHTS/ TRADES

On June 1 the Dec’3/Dec’4/Dec’5 butterfly settled -141 (9521.0/9682.0/9702.0).  On Friday it settled at the high of the year, -14.5 (9453.0/9535.5/9603.5).  Obviously, the biggest adjustment was SFRZ4 which declined nearly 150 bps in four months.  SFRZ3/Z4 went from -161 bps to -82.5.  The forward guidance on higher for longer has been reflected in these spreads.  Over the same timeframe, the 30y bond yield has risen from 3.81% to 4.52%.  While the sell-off in red SOFR contracts may not have a lot more to go, it’s more difficult to make that claim on bonds, especially as a possible gov’t shutdown further exposes runaway spending (and laughable political efforts to stop it).   

COST (Costco) reports Tuesday.  Stock is near the high of the year.  Clues about the health of the consumer. 
MU (Micron Technology) reports on Wednesday after close.  It’s been a beneficiary of the AI splurge.  Possible sign that this mania has been tempered? 

	9/15/2023	9/22/2023	chg
UST 2Y	503.5	512.0	8.5	wi 507.0/506.5
UST 5Y	445.3	456.7	11.4	wi 457.0/456.5
UST 10Y	432.2	443.6	11.4
UST 30Y	441.2	451.8	10.6
GERM 2Y	321.5	325.9	4.4
GERM 10Y	267.5	273.9	6.4
JPN 20Y	142.8	144.9	2.1
CHINA 10Y	266.8	269.2	2.4
SOFR Z3/Z4	-97.0	-82.5	14.5
SOFR Z4/Z5	-63.5	-68.0	-4.5
SOFR Z5/Z6	-9.0	-8.5	0.5
EUR	106.60	106.45	-0.15
CRUDE (CLX3)	90.02	90.03	0.01
SPX	4450.32	4320.06	-130.26	-2.9%
VIX	13.79	17.22	3.43

Sell Mortimer, SELL

September 22, 2023

–If there was ever a repudiation of MMT (Modern Monetary Theory) it’s going on right now.  No Stephanie, the gov’t cannot spend whatever it wants without consequences.  The curve bear steepened yesterday with the ten year yield up 13.3 bps to 4.478% while the two year rose 3 bps to 5.146%. 2/10 (attached) made a new recent high of -66.8.  Stocks tumbled with SPX -1.6% and Nasdaq  -1.8%.  SOFR curve also steepened with reds -8.625, greens -11.75, blues -14.75, golds -16.125.  The green, blue and gold packs (3rd, 4th, 5^th years forward) are all right around 4% at 9602, 9606, and 9597.  The higher for longer theme is weighing on everything.  However, the BOJ is still holding ultra-easy policy and tacitly letting the yen slide.  $/yen now at the year’s high 148.20 having started 2022 around 131.

–One large SOFR option trade of interest: buyer of over 40k SFRF4 9475/9525/9575 c fly for 3.5 to 3.75 (settled 3.75 against underlying SFRH4 9459.5).  Expiration is Jan 12.  I guess this guy’s idea of a Happy New Year is when the wheels fall off the economy and the Fed is forced into cuts.  Taking the opposite side was a buyer of about 60k FFX3/FFF4 spreads for 6.0 (9460/9454).  FOMC meetings are Nov 1, Dec 13 and Jan 31.  Somewhat strange OI changes: according to prelims Nov had volume 231k and Jan 138k.  OI was up 59k in Nov and just 7748 in Jan.  In any case, if the Fed were to hike in Nov and skip in Dec, (or if perceptions solidify around that scenario) then the spread would move towards zero.  So this spread really isolates odds for a December rate hike: a skip in Nov and a hike in Dec, or hike/hike.  Pay 6 seems a bit high to me.  The Jan/Feb spread, FFF4/FFG4, settled 0.5, 9454 and 9453.5.  That spread isolates the Jan 31 meeting; a price near zero indicates that nothing will happen.  A more passive/aggressive trader than the Jan call fly buyer would sell F4/G4 into inversion, looking for the Jan ease.  SFRZ3/H4 settled -7.5 (9452.0/9459.5).

–S&P Composite PMI was 50.2 last, expected this morning at 50.1.  

2/10 below

SOFR curve won’t adjust all the way to Fed’s projections

September 21, 2023

–For a long time, long dated assets were underpinned by the idea that Fed rate increases would be significantly reversed in the coming year.  That assumption was crushed yesterday as the Fed raised the FF end-of-2024 dot from 4.6 to 5.1.  The 2023 estimate for FF remained at 5.6, same as June, indicating one more hike this year.  I marked tens yesterday (at the time of futures settle) at 4.345% but this morning the yield is over 4.42%.  SPX down nearly 1% yesterday and is lower as of this morning, with ESZ printing 4428, down 19.

–There had already been a large adjustment to higher yields in red SOFR contracts as mentioned yesterday.  So, the red pack barely changed on yesterday’s settle at +0.75.  SFRZ4 was down 1 at 9538 and SFRH5 was +0.5 at 9568, with more deferred contracts settling +2 to +3.  Even as the Fed’s FF projection took the 2023 to 2024 spread from -100 bps to -50 bps, the SFRZ3/SFRZ4 spread was unch’d at -86 (9452/9538).  It might be more reasonable to ‘split the difference’ and move Z3/Z4 towards -75, but the market does not currently think the Fed can carry through on keeping the rates high for another year given deterioration in some economic data.  Perhaps more interesting is the 2024 to 2025 FF spread.  The Fed kept that at -120 bps, from 4.6 and 3.4 estimates made in June to 5.1 and 3.9 yesterday.  SFRZ4/SFRZ5 did make a new low at -70, down 3 on the day (9538/9608).  The Fed’s dot plot suggests the 2023/2024/2025 butterfly at +70 bps -(5.6 – 2*5.1 +3.9).  While the Z3/Z4/Z5 fly has recently barreled higher and settled yesterday at a new high of -16 (9452/9538/9608), a move into positive territory would be surprising.

–There was a buyer of about 10k 0QH4 9525/9425ps for 14.5 (ref 9577) yesterday in a nod to the Fed.  Settled 16.25 (18.75/2.5) ref SFRH5 9568.0.  So, on settlement H4 is still at a rate of only 4.32%.  

–The economy has simply been more resilient than the Fed had anticipated.  The risk is that this SEP is over-correcting and the guidance embedded in the projections will tighten financial conditions (lower stocks, higher rates, stronger USD, wider credit spreads) such that the June estimates would have ultimately been more accurate.

Today’s missing hike has been priced into SFRZ4

September 20, 2023

–All treasury yields ended at new highs except for the long bond, with 2s up 4.5 to 5.105%, 5s up 6.0 to 4.52% and 10s up 4.8 to 4.365%.  The 30y ended at 4.424, up 3.0, just a couple of bps off the high.  Once again new contract lows in SFRH4 to SFRZ5, with H5, M5 and U5 settling down 9 on the day (weakest).  Even on new lows, open interest is declining in SOFR: Z3, H4, M4, U4 lost a combined 77k contracts, more indicative of long liquidation than new sellers.

–It’s FOMC day, widely expected to result in a policy skip with the door left open for a November hike. 2024 dots for growth and FF target will likely both be revised higher.  FFX3 settled 9459.5 or 5.405% just 7.5 bps above the current EFFR, so as of yesterday, even the November meeting leans towards the idea of the Fed being done.  SFRZ3 settled 9453.0 (-0.5).  More important has been price action in forward contracts, which says more about duration than level.  Consider SFRZ4: on 8/28 it settled 9564.5, by 9/1 it was 9581.5, and yesterday settled 9539.0.  There’s your forward restraint being priced in with a ‘hike’.  A fall of 24.5 bps since 8/28!  And, if measured from 9/1, a plunge of 42.5.  Of course at yesterday’s settle of 4.61%, there is still significant ease priced into next year, but not in the category of ’emergency’ rate cuts.  That’s not to say that large cuts couldn’t occur, for example there is continued buying of SFRM4 9600/9700 cs, yesterday about 20k for 7.5 (settled 7.25 ref 9480.0).  

–I attached a chart of SFRZ3/Z4/Z5 butterfly which has rumbled from -140 since the start of June to -22 yesterday, as SFRZ4 withdrew from the idea of aggressive easing.  I also added a chart of Russell2k to SPX ratio, as many have pointed out the relative weakness of small caps.  Are these two charts consistent?  Perhaps so, as the fly reflects higher for longer, which will kill prospects for small cap companies that need to roll debt next year.

New high SFRZ3/Z4 in front of FOMC

September 18, 2023

–The US curve was mixed Monday.  The two year yield rose 2.5 bps to 5.06% while tens fell 0.5 bp to 4.317%.  2/10 now -74.3. On the SOFR curve, SFRZ3/SFRZ4 made a new high of -94 (9453.5/9547.5) as selling pressure is centered on reds (new contract low settles again in U4, Z4, H5).  In front of tomorrow’s FOMC, the market is increasingly accepting ‘higher for longer’.  However, SFRZ4/SFRZ5 made a new recent low of -67.0 (9547.5/9614.5).  Therefore, SFRZ3/Z4/Z5 fly is making a new high of -27.  Again, it’s the 3rd, 4^th and 5^th SOFR contracts that are weakest.  My view is that Z4 is in for a bounce post-FOMC as open interest changes and implied vol do not seem to confirm a move to new lows (open interest is not increasing and vol slightly lower on new lows).  We’ll see what Powell has in store for us; clearly the GDP growth estimates must be revised higher for 2023 and 2024.

–For context on SFRZ3/Z4, the high just after SVB on March 15 was -56, and the subsequent low in July was -162.5.  In terms of vol, SFRU4 9525^ was over100 a week ago when atm.  Settled yesterday at 95.75 even as the contract has moved to 9514.5.  The 9512.5^ settled 92.5 yesterday.

–20y auction today.  At futures settle the wi was 458/457.5.  

–So much for re-filling the SPR sub-$70/bbl.  CLX3 settled 90.58, was 90.90 late yesterday and prints 91.35 this morning.  We can always sell more bonds at low rates to raise money to buy oil until it comes back to our $70 bid, right? 

–A couple of bullet points from Cass Transports yesterday:

• Despite overall growth of the economy, for-hire freight volumes were down 10% in August. See the role that private fleets are playing.
• Total spending on freight is down 25% year over year.
• The Cass Truckload Linehaul Index, measuring linehaul rates only, declined 11.5% in August 

• ABOUT:
  Former member of the CME specializing in interest rate options and yield curve strategies.