Vol bid in treasuries, lower VIX, as curve inverts to new lows
November 26, 2022
–Wednesday was the tenth day in a row that 2/10 ended lower. It closed just under 77 having printed as low as -80. On Nov 9, I marked 2/10 at -47.7 while BBG has -49.3. In any case it’s a drop of around 30 bps in two weeks. Dec 14 FOMC is two and a half weeks away. [My marks are at 2:00 CST, futures settle]
–Headlines out of Fed minutes: ‘most Fed officials favor slower tightening pace soon and various Fed officials see higher peak rates’. Result…more inverted curve with the inflection point moved slightly further forward.
–Red/green (2nd to 3rd year) euro$ pack spread settled at a new historic low of -78. Red/gold pack (2nd to 5th year) spread closed just under -83.0. The most inverted 1-yr calendar on the SOFR (and ED curve) is now Sept’23/Sept’24 at -138. The lowest CONTRACT on the SOFR curve is SFRM3 at 9498.5 or 5.015%. Current Fed Effective rate is 383. So the difference between current EFFR and June SOFR (7 months forward) is 118.5. In the following year, with M3/M4 -126.5, that tightening is expected to be reversed…and then some. When viewed in the context of these inverted spreads, the creative finance packages being offered by mortgage lenders make a lot of sense (“We’ll pay 1% of your mortgage rate for a year”). If dollar curves (and forward yields) are correct, then it’s likely rates will fall by over a percent, which provides a refi opportunity.
–Vol bid in rates. On Monday TYH 112.5^ settled 3’35. On Wedneday atm 113^ settled 3’44 (ref 113-08).
