Lazy days of August
August 12, 2024
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—Main Friday feature was curve flattening with 2s UP 1.3 bps to 4.053% and 10s DOWN 5.7 bps to 3.942%. 2/10 spread, which had nearly poked into positive territory, slipped back to -11. On the SOFR strip, Z4 was -1.5 at 9574, Z5 unch’d at 9673.0, Z6 +2.0 at 9680 and Z7 +5.5 at 9673.5. Just a couple of things to notice from those prices:
1) Z4/Z5 is inverted by almost exactly 1% (-99.0s). The front U4/U5 spread is inverted by 1.5% at -149 (9513.5/9662.5)
2) prices for the next two years from Z5 to Z7 are almost exactly the same, 3.2 to 3.25%. I’m figuring 3.0 to 3.25% as a soft floor for a terminal funds rate.
–This week brings inflation data, with CPI on Wednesday looming as the most important release. Expected 3.0% yoy, unch’d from last month’s print, with Core 3.2%, down 0.1 from previous. Nothing likely to derail Powell from teeing up a 50 bp ease at the Aug 23 Jackson Hole Symposium. Actually, the market is about evenly priced for 25 or 50 with FFV4 settling 9505.5 or 4.945%, 38.5 bps below the current EFFR of 5.33%. Retail Sales on Thursday may have additional importance this week on Thursday. The following week is somewhat light on economic data, and culminates with Jackson Hole.
–August midcurve options expire Friday. SFRU5 settled 9662.5 and the atm 9662.5 straddle settled 20 bps. Rather high straddle price given only five trading days left. On the other hand, in five trading sessions from July 30 to August 5, SFRU5 traded from 9621.5 to 9706.5, a range of 85 bps!
