3 – 6 – 3 on 5/5
May 5, 2023
–NFP today expected 180k. Late headline yesterday, FDIC poised to release plan to refill insurance fund…by making big banks pay more. Fixed it.
–Early morning buyer 100k SFRN3 9575/9587.5cs 2.0 vs selling 9487.5/9475ps 1.0. Paid 1 for package, new position. PS settled 1.25. CS settled 3.0. Underlying SFRU3 settled 9547.5, +23 bps on the day. Just need two more days like yesterday and we’re through the upper strike. Easy. Another small trade that perhaps bears notice: a buyer of 500 SFRH5 100c for 10.5 (10.75s). The specter of negative rates.
–I have never seen a hike immediately followed by expectations of ease the very next day. New EFFR is 508 or 9492. FFM3 settled 9496, +4.5 on the day. June FOMC is the 14th. No Fed move means FFM3 settle 9492, and ease of 25 means 9503.3. So 9496 is an approximate 30% chance of ease. Continuing the theme, SFR three month calendars are projecting nearly linear easing over the next year. June/Sept settle -43.5, Sept/Dec -50 and Dec/March -56. All new lows. SFRM3 settle 9504, U3 9547.5, Z3 9597.5 and H4 9653.5. SFRM3/M4 settled at a new low -192, the most inverted I’ve seen a one-yr calendar, while SFRU3/U4 was unch’d at -174.5. Of course, from March 2022 to March 2023 the Fed hiked by 475, and eases usually come faster, not slower.
–New highs in curve trades: Reds to golds soared 18 bps to -13.625, reds +21.5 (9733), greens +10.625 (9736.6), blues +7 (9722.5) golds +3.25 (9701.75). 5/30 now at +44, +13 on the day.
–Every SOFR contract from Sept’24 back has a 97 handle, that is, sub 3% yield. The golden age of banking had a rule, 3-6-3. Pay depositors 3%, lend at 6% and be on the golf course at 3 pm. Perhaps the forward curve can look like that again…
In any case, let’s knock off early at 3 today and enjoy a few cervezas for cinco de mayo.
CORRECTION: yesterday I started off citing prices for SFRM4, but referred to SFRM3, the wrong year. I meant M4
