More hikes = more bank failures

May 17, 2023

–Fed continues leaning against the short end curve, which has priced significant easing this year.  Mester started it off by saying the Fed is not quite at the ‘hold’ rate yet.  Barkin said he’s willing to raise again if necessary.  Barr and Williams said the banking system is “sound and resilient”.  Goolsbee said it’s too soon to be talking about cutting rates.  SFRH4 was the weakest contract -9 at 9611.5.  SFRU3 settled 9515, down 6 on the day, but that rate is still just 4.85% compared to EFFR of 5.08%.  I.e. the market is giving a bit of ground, but not all the way.  Spreads continue to reflect expectations of significant easing, even if the timetable is pushed out marginally:

–SFRZ3/Z4 made a new recent low a -150 (9558/9708, down 4.5 on the day), low settle just before SVB was -158.5.  Lowest 1-yr calendar is still SFRU3/U4 at -174.5.  SFRZ3/M4 6-month calendar settled exactly at -100 (9558/9658, down 1 on the day).  Ten year yield rose 4 bps to 3.547.

–Powell speaks on a panel Friday joined by Bernanke, our friendly advocate of helicopter money to fight deflation.  From his November 2002 speech: ” But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”  Does it have an “on/off” switch?

–Home Depot warned about forward sales.  Retail Sales were +0.4.  Not great on a real basis.  PACW settled 4.57, down 14.6%.  PACW was around 30 in early February.  I am seeing many articles and ads about high CD rates; banks need funding costs below that of their assets.  The Fed seems intent on driving funding costs higher.  It doesn’t help much if a bank is able to maintain its deposit base if those funds cost significantly more…

–Seeing a bit more about the dwindling balance in the TGA, now around $87b vs typical need of > $600b.

Posted on May 17, 2023 at 5:44 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Retail Sales today, 20y auction Wednesday

May 16, 2023

–Retail Sales today expected +0.08, ex-auto and gas +0.2%.  Yesterday’s Empire State Mfg at -31.8 was much lower than expected, has only been more negative once since covid.  

–NY Fed’s Household Debt and Credit report shows that auto loan and credit card delinquencies are rising, but not yet at dangerous levels. 

–Markets were quiet.  All SOFR straddles down 1-3 bps at settle.  For example, SFRH4 9618.75 straddle was sold down from 128 to 124.5 and settled 123.75 ref 9620.5.

–Attached chart is 5y and 10y breakeven rates on top panel, and the spread between the two in lower panel.  In lower panel, shaded red area represents 5y < 10yr.  Green shade is opposite, 5y > 10y, which reflects the recent inflation burst.  5y is now lower again, 213 bps vs 220.5, indicating inflation panic has subsided.

Posted on May 16, 2023 at 5:07 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Free Loans at Risk

May 15, 2023

–Selling pressure across rate futures on Friday, led by weakness in the front end.  SFRZ3 settled 9567.5 (-10) or 4.325%.  The red pack settled 9698.0 or 3.02%. down just over 12 on the day.  The 2y note ended at 3.99%, up 8.7 bps on the day, tens +6 at 3.455%. Vol softened considerably in SOFR.  For example, SFRU3 9525^ settled 63.0, one week ago the atm 9531.25^ was 74.0.  On Friday SFRU3 option trading favored the upside.  Buyer of about 15k each SFRN3 and U3 9525/9575/9625 c flies, settled 4.0 and 3.0 ref 9522.5.  Seller of 20k SFRU3 9506.25/9493.75/9481.25 put tree for credit of 0.75 to 0.5 (buying top strike for credit; settled -0.25).

–Retail Sales tomorrow.  Several articles note that credit card spending is slowing. 

–According to @FreightAlley, ever since COVID, “$1.12 trillion of student leans remain in forbearance… On July 1, 2023, the student loan forbearance program ends and payments will resume.”  This deferral has been repeatedly extended by the Biden administration, but there is apparently a suit that questions the legality of using the HEROES act to extend non-payment. 

–Total student loans are over $1.7 trillion with most of that owed to the federal government.  If the interest rate is 5% and the amount in forbearance is $1 trillion, then that’s a subsidy of $50 billion/yr.  The attached link claims $5 billion per month.  That’s a lot of Starbucks lattes. I view this as a direct withdrawal from Consumer spending (if it occurs).  It’s not as if gov’t spending goes up due to the windfall, gov’t spending will continue at its same unsustainable pace.  Also, it’s likely the case that a large chunk of those loans will never be paid.  But if the deferral ends, it’s another factor likely to restrain consumer spending.

$1.12 trillion worth of student loans remain in forbearance, meaning that payments have been temporarily paused. On July 1, 2023, the student loan  forbearance program ends & payments will resume.


If you got your Direct Subsidized or Unsubsidized Loan on or after July 1, 2022, and before July 1, 2023, it will have a fixed interest rate after the payment pause ends: For undergraduate students, the interest rate for Direct Subsidized Loans and Direct Unsubsidized Loans is 4.99%.

Posted on May 15, 2023 at 5:25 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Prices don’t lie

May 14, 2023 – weekly comment


Still a man hears what he wants to hear and disregards the rest.

–Simon and Garfunkel- The Boxer

The odds that the United States will fall into a recession at some point over the next 12 months have risen to a 40-year high, 
according to a probability model from the NY Fed.

The probability that the country will enter a recession within the next year has risen to 68.2 percent, according to the New York Fed, which is the highest level since 1982.- Epoch Times

What does that mean for us?  We’re probably in recession now. Does it mean that equities in general will decline?  That interest rates fall?

From Michael Lewis’ book, The Undoing Project:
As it turned out, the Jackson Prison inmates choosing between gambles had a lot in common with Kenneth May’s students when they chose between spouses: After they had said they preferred A to B and B to C, they could be induced to prefer C to A. Even when you asked them up front whether they would ever choose C over A and they insisted they would never do such a thing, they did it…

In some of our biological systems we are equipped to detect big differences, in others small ones – say a tickle versus a poke.  If people can’t detect small differences, Amos figured, they might violate transitivity.  

This book is about decision making, mostly exploring the work of Daniel Kahneman and Amos Tversky.  It has many fabulous examples of flawed choices resulting from unconscious bias.  In a world filled with cocksure confidence and righteousness about every social topic, it’s a refreshing read especially from a trading perspective. An early summary of research by Tversky:

People predict by making up stories.
People predict very little and explain everything.
People live under uncertainty whether they like it or not.
People believe they can tell the future if they work hard enough.
People accept any explanation as long as it fits the facts.
The handwriting was on the wall. It was just the ink that was invisible.
People often work hard to obtain information they already have and avoid new knowledge.

I have seen several articles about the vibrant China “re-opening”.  However, when looking at the Li Keqiang index, base metals prices, and China’s ten year yield, the story seems to be one of economic stagnation. The Li index measures rail freight, electricity consumption and bank lending.  China’s ten year yield is now 2.7%, at the low of this calendar year, having been as high as 2.93% in the beginning of March.  

Here’s a little clip from Barron’s:
Many investors are underweight stocks and focused on what could go wrong. A possible Federal Reserve rate pause is something that could go right.

Is that some sort of insight to help with our investment decision-making?  If anything, it’s a disservice. 

There are a lot of stats like the NY Fed recession probability one, cited not just as two-in-three but 68.2%.  What’s the purpose of the extra decimal?  Probabilities in markets change all the time, the search is to trade one market with high odds of a given scenario, vs one trading at lower odds.

In US markets, expectations of rate cuts are gaining ever more traction.  This fact is overtly priced.  The rolling first to fifth SOFR one-year calendar spread has been inverted almost the entire year, apart from a brief flirtation with zero after February’s stronger than expected payroll and inflation data.  SFRM3/SFRM4 settled -173 on Friday and SFRU3/U4 settled -172.5, both near lows of the year, which happen to be near historic lows.   FFU3/FFU4 settled -179; it’s the most inverted 1-yr spread on that curve.  The two-yr yield has oscillated around 4% since mid-March, having been above 5% just prior to SVB’s collapse.  The green and blue (3rd and 4th year) SOFR packs have been consistent with forward funding rates of 2.5% to 3.25% all year.  Green pack (SFRM5, U5, Z5, H6) settled just above 9721 on Friday, or 2.79%, while the blue pack (M6, U6. Z6, H7) settled 9713.75.   

Rate futures are forecasting lower inflation and growth.  The response in the past week has been to play for a somewhat accelerated timetable of possible easing.  For example, there was a buyer of 15k SFRN3 9525/9575/9625c fly for 4.0 (settled 4 vs U3 9522.5).   The same structure was bought in September, and SFRU3 9512.5/9537.5/9562.5 c fly was bought for 1.75 (settled 1.5).  These trades stand to work if the thesis is right, with limited damage if wrong.

Obviously, new information could change the outlook.  The stories being predicted by Federal Reserve officials have not been particularly accurate and often haven’t even fit the facts. 

In the clearing stands a boxer
And a fighter by his trade
And he carries the reminders
Of every glove that laid him down
Or cut him till he cried out
In his anger and his shame
“I am leaving, I am leaving”
But the fighter still remains

UST 2Y392.2399.16.9
UST 5Y341.6344.32.7
UST 10Y343.3345.52.2
UST 30Y375.3377.52.2
GERM 2Y257.2259.42.2
GERM 10Y229.0227.6-1.4
JPN 30Y126.4123.9-2.5
CHINA 10Y273.6270.6-3.0
SOFR M3/M4-176.0-173.03.0
SOFR M4/M5-50.5-55.5-5.0
SOFR M5/M65.02.5-2.5
CRUDE (CLM3)71.3470.04-1.30
Posted on May 14, 2023 at 2:01 pm by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Lumber was 1600 in 2021. Now 348.

May 12, 2023

–PPI yoy just 2.3% yoy.  Core 3.2%, both lower than expected.  Yields fell immediately but ended only marginally lower.  10s fell 4.3 bps to 3.394%.

–Copper futures fell to their lowest level in 2023 (HGN3 3.71). As can be seen on attached chart, lumber is back at 2018 level, less than one-quarter of the high price set in 2021.  Ten year breakeven (treasury/tip) ended yesterday at a new recent low 217 bps.  An indicator Gundlach has cited is the copper/gold ratio vs the ten year yield.  The latter should be crashing, not that 3 3/8% is high.  

–New low in SFRU3/U4 at -177 bps.  SFRM3/M4 settled -183.5; the front spread is the most inverted.  A twitter clip from yesterday said the ratio between tech stocks and S&P 500 is 2 standard deviations above the historical mean.  Not even sure why I am adding that snippet, except to say that it’s all about big tech, which trade like long-dated bonds. 

–May SOFR option expiration today.  SFRM3 is trading 9494.5, pegging the 9493.75 strike.  There are 82k May 9493.75c open, settled 2.0 and 226k 9493.75 puts open, settled 1.25.  

Gundlach indicator below…added BKX, a regional bank index


Posted on May 12, 2023 at 5:31 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Inflation deceleration

May 11, 2023

–CPI slightly better than expected at 4.9% yoy.  NY Fed’s Underlying Inflation Gauge declined as well: 

–Rate futures immediately surged as the market was set up short going into the data.  Tens ended down about 8 bps to just over 3.43%.  SFRM4 was the leader on the SOFR curve, closing +16 at 9679.  New low settle in SFRU3/U4 one-yr calendar spread at -176 (9532/9708) down 6 on the day. (Low settle on any 1-yr calendar has been M3/M4 at -192). 

–On Tuesday NY Fed’s Williams said he didn’t see any reason for the Fed to cut rates this year.  Consider these six-month spreads:  SFRU3/SFRH4 settled -102 (9532/9634).  SFRZ3/SFRM4 settled -99.5 (9579.5/9679).  The market doesn’t much care what Williams thinks, forward spreads indicate fairly dramatic cuts, even if the Fed can hold steady in the short term.

–The stock market DOES care however, about what Nick Timiraos says: “If the Fed was poised to take a summer vacation, the April CPI report won’t spoil those plans.” (Afternoon tweet).  Stocks responded positively.  The good news is that inflation is stabilizing.  The bad news is that the credit crunch is just beginning and the debt ceiling circus is in full swing.

–PPI and 30y auction today.  PPI yoy expected 2.4% with Core 3.3%. 

Posted on May 11, 2023 at 5:16 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Inflate out of it

May 10, 2023

–Three yr wi was 3.723, went off 3.695; strong demand.  10y today.  NFIB small business optimism weak at 89.0.

–CPI today expected 5.0 yoy vs 5.5 and Core 5.5 vs 5.6.  

–Vol up in front SOFR contracts, for example SFRH4 was down 0.5 at settle (9618.5) but almost every otm call settled +1 on the day.  SFRH4 9625^ settled 132.75, was 129/130 Monday.

–Yesterday I cited St Louis Fed chart showing that HH equity in residential real estate was near a record high 71%.
Today are some excerpts from the FOR, Financial Obligations Ratio, which shows mortgage & consumer credit in separate columns.  The FOR adds rents, auto leases, home insurance and property taxes.  Overall the household sector currently looks ok, though the report notes that calculations are difficult and that changes are the most important aspect of the report.

Posted on May 10, 2023 at 4:58 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

Households’ Equity in Residential Real Estate Near Record High! 

May 9, 2023

–Below is a somewhat interesting bit of data.  From the chart, Household Owners’ Equity as a Percentage of HH Real Estate, one can see that Households have about 71% of equity in Real Estate, the highest level since the 1950s!

–No wonder Tom Selleck (sell out) is out there shilling for reverse mortgages on late night commercials.

–From the Z.1 quarterly Fed report, the amount of Home Mortgage debt at the end of 2022 was $12.5 trillion, while the “value” of real estate was $43.5 trillion (up 10.7% in a year).

–From this data, THERE IS NO REASON TO WORRY ABOUT MORTGAGE DEBT and HOUSING, if, that is, the value assessed by the Fed is anywhere near correct.

From Z.1 HH Home Mortgage $12.515T, up 6.5% in a year.

Posted on May 9, 2023 at 5:30 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

“Sound and resilient” or downed and deficient ?

May 9, 2023

–Yields rose Monday in a quiet session.  The Fed’s Sr Loan Officer survey was met with a yawn, though it pretty much confirmed that credit is tightening across every sector.  The ten year rose 7.8 bps to 3.52% with auctions of 3s today, 10s Wednesday and 30s Thursday.  The curve had a small bias toward deeper inversion, with 2s +8.7 bps to 4.01%. Reds -8, greens -6.125, blues -4.875.  SFRH4 was the weakest SOFR contract at 9619, down 10.5 on the day.

–Besides the Sr Officer Survey, the Fed released a financial stability report.  I only skimmed the Salient Near-Term Risks on page 61, with the following Summary: 1) Persistent Inflation and monetary tightening 2) Stress in banks and other financial institutions 3) Commerical Real Estate 4) Geopolitical 5) Debt Limit.  
I don’t think it takes a financial wizard to SEE the risks, but the Fed’s job is to head them off at the pass.  That’s where things have gotten a bit snarled.

–FFM3 and FFN3 both settled 9492.0, exactly at the new EFFR or 5.08%.  FFQ3 settled 9499 (-3 on the day) or 5.01%, so easing is still being priced, but less aggressively so.  SFRM3 9493.25^ settled 20.25 ref 9493.0.  As long as the Fed sits idle at the June meeting, as prophesied by FF contracts, then the final settle should remain within the breakeven parameters of the straddle; not enough play for the July meeting.  Unless: inflation is high, more banks fail, CRE loans go bad….etc.

Posted on May 9, 2023 at 5:19 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options

A hint of the credit crunch to come

May 8, 2023

–The Fed’s SLOOS is out today, I believe release time is 2:00 EST.  The Sr Loan Officer Survey on Bank Lending Practices.  This is a quarterly report, the last one was released Jan 6.  From that report: 

“Regarding expectations for credit quality—as measured by delinquencies and charge-offs—major or significant net shares of banks reported expecting a deterioration in credit quality across all loan types over 2023.”

–There will likely not be an improvement in terms of tone.  A BBG interview with Hugh Hendry and Chris Whalen right after the FOMC meeting last week had this line from HH: “We are on the verge of a catastrophe which will rival 2008.”  Hendry suggests that bank depositors will be “gated”.  [It won’t happen].

–Friday saw yields back up, with tens up 6.3 bps to 3.44% and 30s +4 bps to 3.755%.  The 2y yield surged 18 bps to 3.922%. NFP was stronger than expected 253k and the unemployment rate printed at 3.4%, an historic low.  Buyer of 50k 2QH 9500/9475ps for 1.5; settled 1.25 ref underlying SFRH6 at 9720.   The six month calendar SFRU3/H4, Sept’23 to March’24 settled Friday at -98.5 (9531/9629.5).  On Thursday it was -106.  Of course the curve has been inverted for some time, but a near spread which is basically forecasting a cut of 100 bps after another robust employment report is rather incongruous. 

–I haven’t been watching bitcoin particularly closely but this morning the May future is down 1800 at around 28k.  Every time I skim the news, I see another problem cropping up for Binance.  Might be getting close to critical mass in terms of failure. 

Posted on May 8, 2023 at 5:45 am by alexmanzara · Permalink · Leave a comment
In: Eurodollar Options