Auctions capped by CPI on Friday
June 6, 2022
–Slightly better than expected jobs number (NFP 390k, rate 3.6%) sent yields higher and stocks lower. Tens up 3.8bps to 2.955%. SPX fell 1.6%. The curve flattened with a slight new recent low in reds to greens (2nd to 3rd year) at -27.125 (continued reaction to Brainard’s no pause in Sept). The low for this spread was in the beginning of April at -35.875. 5/30 ended at positive 15.2, though the low of the year on 4/1 was negative 12. EDM’23 remains the cheapest contract on the strip at 9652, and it’s lower this morning printing 9649. US auctions of 3s, 10s and 30s to raise $73b of new cash will likely require a bit more of a concession, especially without the Fed safety net.
–June Eurodollar contract expires Monday, a week from today, and June midcurves expire Friday. 0EM2 (short red June midcurve) 9650 straddle settled 15 vs 9652, likely a fair value, CPI on Friday. ECB on Thursday. ERM2/ERM3 one-year calendar settled at a new record high of 196.5 bps, so they are expecting big things from Lagarde over the next twelve months.
–New buyer Friday of 40k EDQ2 9750c for 7.0, 0.32d, covered 9735.5 which settled 6.25 vs 9735.0. The strike is 2.5%. June and July FOMCs are fully priced for 50 bps per meeting, which will take EFFR to 183. A pause in Sept (if priced with certainty) would likely push these calls well in the money. However, FFV2 (October FF which fully prices the Sept 21 FOMC) are currently 9774.0 or 2.26%. So the market is close to pricing another 50 in Sept… KC Fed’s Jackson Hole is August 25-27; the EDQ options expire August 12. One could argue that a better trade is to SELL the Aug ED 9750c and buy FFV2. If the Fed goes 50 at the next three meetings, EFFR should be 233, a price of 9767.0. Theoretically, that’s 7 bps of risk on the current FFV price of 9774.0, essentially covered by the ED call sale. The problem, and there is always a potential problem, comes on a 75 bp zinger by the Fed. (This is NOT a recommendation).
