Dec and Dots
March 18, 2024
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–Several near SOFR contracts made new lows on Friday, and treasury yields are at or close to new highs for this calendar year. Tens ended at 4.302%, up about 1 bp; high of the year has been 4.323%. Fives ended at 4.323%, high in Feb is 4.329%. SFRZ4 posted a new low settle for the year at 9540.5 (down 2.5 on the day). Last October’s low settle was 9519.5, of course at that time the contract was 14 months forward as opposed to 9 currently. I highlight December simply because that contract has the most relevance with respect to Wednesday’s dot plot.
–The surprise at the December FOMC was that the 2024 estimate for FF was moved down to 4.6% from 5.1 in Sept. As a price, that’s 9540, exactly where Z4 is currently. Some are expecting one of those three eases to be withdrawn on Wednesday. Perhaps of equal interest is the end-of-year 2025 projection for FFs. The December estimate was 3.6 which had been reduced from 3.9 in Sept. In futures terms, 3.6 is 9640, or 100 lower than the Dec’24 estimate. However, the Z4/Z5 calendar settled -72.5 (9540.5/9613.0), about 1/4% away from the dot plot of -100. A strong signal of ‘higher for longer’ would be a bump back up to 3.9 for 2025, which would also perfectly sync with the current SFRZ5 price.
–There were a few 10-15k blocks which went through on Friday which sort of target 4% for 2025:
SFRM5 9637.5/9587.5/9537.5 put fly 9.5 paid 17.5k
SFRU5 9675/9600/9525 p fly 17.5 paid 7k
SFRZ5 9675/9600/9525 p fly 15.5 paid 9k
The latter two have 9600 as middle (target) strike, which is 4%. Not that these will be held to maturity, but the implication is that these red contracts become less volatile and gravitate around current levels.
–BOJ expected to end negative rates and perhaps lift the yield cap on JGBs tomorrow. FOMC announcement Wednesday. 20-year auction tomorrow.
