Last Straw?

February 17, 2021

–The curve steepened to new highs yesterday with 2/10 at 117.5 and 5/30 at 152.7.  From Friday’s close, red/gold pack spread widened a whopping 13.625 bps to 127.  As mentioned over the weekend, some near term targets are close at hand: 125 to 127 in 2/10 and 160 to 162 in 5/30.  Ten-year inflation breakeven closed at a new high 225 bps.

–Nice buy of 125k 3EM 9875p last week for 3.5 ref 99.09.  Settled 7.5 yesterday vs 9896.5.  

–I saw a couple of things on twitter about if/when the Fed ‘panics’ with this rise in rates.  One client asked how the Fed might signal that it intends to cap longer term rates.  I think the first clue would be when Fed officials start to voice worries about mortgage rates and the possible slowdown of the housing market. Of course, Powell already said that a lot of housing strength was likely temporary as people changed homes due to COVID.  In any case, I have seen several recent news items noting that mortgage rates are at all-time lows.  Currently the 30 year mortgage rate is about 2.75%.  On $250k that’s $1020 per month.  At 4% the payment goes up 16.5% to $1194.  Enough to change the equation?  I’m not sure, but I do know that interest rate cash flows are the eventual straw on the camel’s back.

–In 1987, before the October crash, tens went from around 7.25% in March to 9.25 in the beginning of October, an increase of about 27% in terms of yield change.  Before the big Nasdaq crash, the ten year went from around 5.25% in Q1 1999 to 6.75% by Jan 2000, an increase in yield of about 28%.  This time around, we’ve seen tens go from about 60 bps in August to 130 bps now…more than double.  Of course, corporate bond yields and mortgages remain close to historic lows, but eventually there’s a spillover.


Posted on February 17, 2021 at 5:25 am by alexmanzara · Permalink
In: Eurodollar Options

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