In for a long slog
October 20, 2023
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–Wild volatility after Powell’s comments which resolved in a much steeper curve and lower equities. We’re faced with geopolitical tensions and continued inflation risks, coupled with signs that conflicts are going to expand. Biden’s speech was solid, but the prospect of steadfast military aid to Ukraine and Israel likely makes bondholders nervous in terms of budget implications, reflected in both higher yields and higher vol.
–The SOFR curve tells the story. The most positive contracts were June’24 and Sept’24, both up 6.0. So:
SFRM4, +6.0 to 9481.5
SFRM5, +2.0 to 9555.5
SFRM6, -6.5 to 9558.0
SFRM7 -11.0 to 9550.5
SFRM8 -12.5 to 9535.0
The treasury curve:
2y -5.3 to 5.163
5y +2.7 to 4.948
10y +7.8 to 4.978
30y +10.1 to 5.091 (high yield in 2007 after the 2004-06 hiking campaign to 5.25% was 5.4%)
Bear steepener. June’25 through June’28 are all essentially the same price around 4.5%. One might conclude that the Fed is somewhat handcuffed by fiscal dominance; geopolitical and economic uncertainties make it hard for the Fed to tighten in the short term, but the prospect of increased gov’t spending means the Fed will NOT be able to ease in a significant way for the foreseeable future. Is that the correct interpretation? I don’t know, but I do know that if forward earnings are discounted by 4.5% rather than 4% or lower, then equities face headwinds.
–2/10 new high -18.5 bps.
