They say don’t fight the Fed
November 23, 2022
–They say don’t fight the Fed, and they’re not, at least at the very front end. SFRH3 was -2.5 to 9497.5 yesterday or 5.025% in front of this afternoon’s Fed minutes. FFF3 settled 9561.5, down 1.0. Current Fed Effective is 383, so a 50 bp hike would take EFFR to 433 or 9567.0; FFF3 moved ever so slightly closer to a 75 hike rather than 50. A pretty valiant stand at the front lines, but the market is attacking the right flank. Huge call spread buying continues in back SOFR.
SFRZ3 9625/9725cs 17 paid for 15k. 9700/9800cs 9.25 for 4k
SFRU3 9700/9800 4,5 for 5k
SFRH4 9700/9800 15.5 for 5k
SFRF3 9537.59562.5 2×3 1.5 paid for 12.5k
–Vol firming on move to lower rates in back part of curve and in ED/SOFR. Could systemic issues be lurking? A couple of days ago TYH 112.5^ trade 3’33. On Monday it settled 3’35 and yesterday the atm 113^ settled 3’40. Not the normal weekend holiday trade.
–New lows in curve spreads as the ten-year yield fell 7 bps. For example, 2/10 fell to a new low, down over 6 bps to -76.0. Red/green eurodollar pack spread also posted a new historic low of -75.375. SFRZ2/H3 three-month calendar settled positive 44.5, allowing for a hike at the Feb 1 FOMC…it’s the highest three month spread (9542.0/9497.5). What a difference a year can make: SFRZ3/SFRH4 is NEGATIVE 42 and was -42/-41.5 late, indicating an ease over that period (9543.5/9585.5). When considering these two spreads in terms of 1-yr calendars, Dec/Dec prices are nearly identical with spread -1.5, while March/March is -88. Lowest 1-yr spread on the SOFR curve is Sept’23/Sept’24 at -130.5 (9510.5/9650).
–I would call this pricing unusual, (like just about everything else I see around me). Stocks appear to be encouraged by declining forward rates, but the REASON may end up being key. Due to falling inflation expectations? Or a dive in growth?
