Accidents will happen
March 26, 2024
******************
–Yields rose Monday with tens up 3.5 bps to 4.251% and SOFR contracts down 3.5 to 4.0 from Dec’24 to Dec’28. The lowest contract on the strip is front June’24 at 9489.0 while the peak is Dec’26 at 9635.5, a spread of just -146.5 over two and a half years. Just in January the near 1-year calendar was more inverted (around -160). Current SFRM4/M5 is -107.5. Forward rates have moved slightly higher, and of course there are still trades fading the three-cut dot plot. For example, yesterday a buyer +20k SFRU4 9512.5/9493.75/9487.5p tree 2.50 to 2.75, which would probably work best in the scenario Bostic mentioned yesterday: just one ease this year. (SFRU4 9518.5 settle).
–I looked at the dot-com unwind from 2000, and it’s worth noting that the FF target was slashed by 250 bps in just six months starting in 2001, from 6.5 to 4.0%. That was before 9/11, which prompted a 50 bp cut to 3.0%, followed by another in October. Sort of a reminder not to leave open upside shorts.
–Solid 2y auction yesterday, with 5s today and 7s tomorrow. Cocoa prices continue to skyrocket, having more than doubled since January. From Barchart: “Cocoa prices catapult to record highs as Ghana’s output expected to plunge.” What? We’re depending on Ghana for chocolate? Yes, and dependent on Taiwan for semis.
–On the other hand, US oil production has been increasing. However, CLK4 remains stubbornly bid at 81.85 late (+1.22). Near contracts trade around a $7 premium to next year, for example CLM4/M5 was 7.29/7.32 late. RJOs Tom Fitzpatrick made the point that since high oil prices don’t seem to be driven by demand, they act more as a tax on the economy.
–The dramatic collapse of a bridge in Baltimore as a ship accidentally hit a support, will likely spark calls for infrastructure investment. Broken bridge (window) fallacy?
