Heading into (for a) Fall
September 20, 2024
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–Autumn solstice September 22.
–Fed’s SEP on Wednesday had 4.4% as their end-of-year FF projection for 2024. So someone bought 70k SFRX4 9562.5/9550ps for 0.5, probably in the belief that the Fed’s target has merit. You know when the Fed is REALLY good with their year-end projection? At the December FOMC, that’s when. In any case, it’s not a lot of premium, and if stocks continue their run, maybe Powell will reconsider easing into an asset melt-up. Even with put buyers, SFRZ4 posted a new high settle at 9601, up 2 on the day and sub-4%. Contracts from SFRM5 on back settled successively lower on the day, M5 -0.5 at 9690.5, M6 -0.5 at 9708.5 but M7 -4.0 at 9696.5 and M8 -6.5 at 9684.5. All sort of clustered around 3%.
–Nov SOFR options expire 15-Nov, capturing NFP (nov 1), election (nov 5) and FOMC (nov 7). There is no update to the SEP (projections) at the Nov meeting.
–Steepening was mirrored in the treasury curve with 2s down 1.9 bps to 3.596 and 10s up 3.6 to 3.73 . That level of 13.4 is a new high in 2/10 spread, and is nearing the 50% retrace level from the 2021 high of +157 to the 2023 low of -108, which is +25. (chart below) Late in the day there was a buyer of 30k TYZ4 105p for 2/64s. On Wednesday same guy paid 2 for 35k of the TYZ 105.5 strike. I’m not sure of the equivalent yield level; right now there’s about 15 bps per point in the TYZ contract which settled 114-235. This guy is protecting the BIG move, (and taking advantage of lower vols). Perhaps a modicum of concern is creeping into the market that Treasury won’t have such an easy time selling debt post-election. However, if SFRZ4 is “right” at 4%, then by year end, there will no longer be negative carry on the long bond (30s are now 4.066%). I’m taking liberties regarding relative moves, but the point is that a positively sloped curve with lower funding rates will make debt sales a lot easier. 5/30 also closed at a new high of +57 bps (3.496% and 4.066%). Note that 2, 5, 7 year auctions are next week.
–$/yen rebounding as BOJ stands pat on rates, holding at 0.25%. Current 143.83 having briefly dipped below 140 on Monday. Equity op-ex today.
