Loans
November 26, 2023
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From The St Louis Fed: Bank Credit is a category on the asset side of a banks balance sheet. It is the sum of (i) Treasury, Agency, and other securities, and (ii) loans and leases.
Below charts are % yoy changes from the St Louis Fed (Fred)
The top chart is ‘Bank Credit, All Commercial Banks’ last at -0.9%. Graph starts in 1990, and before now has only been negative In the period associated with the GFC.
The chart below covers the same time period but is just the ‘Loans and Leases’ part of bank credit. Obviously doesn’t look quite as dire, but has also seen a rapid drop, last at +3.7%.
In my opinion, the biggest factor going forward is the health and propensity to spend by the US consumer. I would surmise that the decline in the growth rate of loans and leases suggests a weaker rate of growth in the economy and in labor demand, to be followed by a softening in consumer spending. Q3 Chained $ GDP QoQ was 4.9% (second estimate is out on Wednesday). The Atlanta Fed’s GDPNow projection for Q4 is 2.10% and the NY Fed’s Nowcast is 2.17%.
The Nov 20 edition of Almost Daily Grants has this tidbit:
It’s the choice of a new generation: CEOs are dusting off some old-school vernacular in their communications with investors and analysts. The term “choiceful” – whether used to describe cost-conscious consumers responding to recent price pressures or their company’s own strategic actions – has appeared in 15 S&P 500 earnings calls year-to-date…up from nine mentions last year and just a pair of instances in 2021.
That adjective, which dates from the late 1500s according to the Oxford English Dictionary… resides within a category of terms “which are not part of a normal discourse and would be unknown to most people.”
Continuing:
Growing ranks of cash-strapped Americans, meanwhile, are compelled into some difficult “choicefulness” of their own. Citing data from Fidelity Investments, BBG reports that 2.3% of domestic workers tapped their retirement accounts via a hardship withdrawal to cover emergency expenses last quarter, up from 1.8% during the same period last year.
One might think that Black Friday sales are a solid metric to gauge the US consumer. However, headlines are confusing. The data from Adobe regarding ONLINE spending seems to have garnered the most attention (from Newsweek):
Americans set a new record for Thanksgiving online shopping, signaling robust economic activity despite inflation concerns, according to new data from Adobe Analytics.
Adobe Analytics reported $5.6 billion in online sales during the Thanksgiving holiday on Thursday, marking a 5.5 percent increase from last year. The figure shatters previous records and represents a near doubling of the $2.87 billion spent in 2017. Mobile sales took the lions share, accounting for $3.3 billion or 59 percent of total online sales. [not adjusted for inflation]
It’s got a bit of a cheerleading aspect to it, doesn’t it? A bit more measured take is this clip from Reuters:
Nov 25 (Reuters) – Mastercard (MA.N) Spendingpulse said on Saturday that U.S. retail sales on Black Friday rose 2.5% year-over-year excluding automotive sales, not adjusted for inflation.
And then this from BBG:
Black Friday shoppers spent a record $9.8b online in the US, Adobe Analytics reported… helped boost the day’s online sales by 7.5% compared with last year.
Consumers extended their budgets by leaning on buy-now, pay-later options, which climbed by 72% from the week before Thanksgiving.
The Buy-Now gimmick, though up a large percent, only accounted for $79 million of Black Friday sales according to Amy Nixon. So, miniscule in comparison to total sales, but a stupid idea nonetheless.
My view is that the US consumer either has or is very close to rolling over.
However, even with a tremendous amount of call spread buying in SFRH5, M5 and U5, the SOFR curve is only pricing a modest amount of ease next year (a little over 1%).
Two year and five yr notes saw the largest yield increases on the week: 2s +5.0 bps to 4.955% and 5s up 5.2 to 4.503%. The ten-yr was up 4.3 to 4.48% while the thirty year was up only 1.8 to 4.61%. On the SOFR curve SFRU4 was the weakest, down 8.5 bps to 9520.5 which bolsters the higher-for-longer theme. Another pricing clue along the same line is that the most inverted one-year sofr calendar has moved into the third slot. SFRH4/H5, the second slot, settled -110.0 while SFRM4/M5 settled -110.5. That is, slightly more easing is expected in the year from June’24 forward than March’24.
This week features:
Monday: New Home Sales. 2 and 5y note auctions
Tuesday: Consumer Confidence and 7y auction
Wednesday: Q3 GDP (second est) and Beige Book
Thursday: PCE prices. Deflator expected 0.1% from 0.4% last. YOY 3.1% from 3.4% last. Core yoy 3.5% from 3.7% last.
Friday: Mfg ISM. The Employment report is Friday, December 8.
| 11/17/2023 | 11/24/2023 | chg | ||
| UST 2Y | 490.5 | 495.5 | 5.0 | wi 492.0/915 |
| UST 5Y | 445.1 | 450.3 | 5.2 | wi 448.0/475 |
| UST 10Y | 443.7 | 448.0 | 4.3 | |
| UST 30Y | 459.2 | 461.0 | 1.8 | |
| GERM 2Y | 296.4 | 307.1 | 10.7 | |
| GERM 10Y | 258.8 | 264.7 | 5.9 | |
| JPN 20Y | 146.7 | 149.1 | 2.4 | |
| CHINA 10Y | 265.8 | 270.6 | 4.8 | |
| SOFR H4/H5 | -110.5 | -110.0 | 0.5 | |
| SOFR H5/H6 | -36.0 | -39.5 | -3.5 | |
| SOFR H6/H7 | 2.5 | 4.5 | 2.0 | |
| EUR | 109.20 | 109.48 | 0.28 | |
| CRUDE (CLF4) | 76.04 | 75.54 | -0.50 | |
| SPX | 4514.02 | 4559.34 | 45.32 | 1.0% |
| VIX | 13.80 | 12.46 | -1.34 | |
In: Eurodollar Options
Rates edge higher going into Dec Treasury options expiry
November 23, 2023
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–Rates edged a bit higher Wednesday as U of Mich inflation expectations were higher than projected with 1y at 4.5% from 4.4% and 5-10y at 3.2, same as last but expected 3.1%. A Rainbow Bridge car bomb (yes, it sounds like a politically acceptable cocktail order, but was an actual explosion near Niagara Falls) was dismissed by the market, whether terror related or not. Ten year yield essentially unchanged at 4.414% while the weakest SOFR contract, SFRZ4 fell 4.5 bps in price to 9557.0. 2/10 at a new recent low -49 bps. [buy area]
–This morning yields are a bit higher going into today’s December treasury option expiration. TYZ3 settled 108-26 and is now 108-14 while USZ3 was 115-28s and now 115-00. News today includes S&P PMIs: Mfg expected 49.9, Services 50.3 and Comp 50.4. Next week’s treasury auctions are front loaded: 2y and 5y on Monday and 7y on Tuesday. Jan WTI (CLF4) had a wildly large range Wednesday over $4 (77.97 to 73.79) and is currently 76.70, down 0.40. OPEC+ meeting has been delayed by a few days.
–Turkey in the news but not the pardoned one. The central bank raised rates to 40% to support the lira. Might as well take this opportunity to look at Greece yields, as the 10y is just 3.87%, 60 bps below the US and just 122 over Germany. The yield spread at the beginning of 2012 was 3500 bps.
–I also took a look at Gold vs Palladium with the latter trading at a discount of $934/oz to the former. That’s nearing the 2012 low of 1142 discount. Of course, as a ratio, gold is now nearly 2x more valuable as palladium while at the start of 2012 it was 3x. 2012 was when Draghi uttered his famous line, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” From that time forward, gold weakened. But there’s no Draghi on the world stage right now…
100 bps here, 100 bps there. It all adds up
November 22, 2023
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–SOFR option activity continues to focus on an easing campaign starting next year. Existing Home sales at just 3.79m rate, lowest since 2010, bolsters the rate cut view. Heavy buying of SFRH4 9500/9525cs vs selling 9450p (about 40k). Settled 2.25 in cs vs 3.5 in the put ref 9475.5. SFRH4 9450p now has nearly 300k of open interest, the most of any March put. If one thought the Fed might have to hike further, the 9450p is a buy candidate. More SFRM4 9600/9700c spds bought, 6 paid 20k yesterday, settled 5.75 ref 9500, so exactly 100 bps away. Open interest in this call spread is huge, 309k and 270k. In SFRU4 another 100 higher 9700/9800cs 6 paid 20k, settled there.
–SFRZ3/Z4 one-year calendar settled exactly at -100 (9461.5/9561.5) down 3.75 on the day. Most inverted 1-yr remains H4/H5 at -115.5 (9475.5/9591.0).
–A BBG piece notes that the BOJ has refrained from buying any ETFs or J-REITS this year in a sign of more normalized policy. Of course, Nikkei 225 is +30% ytd. I was thinking a bit more about Binance and bitcoin. Changpeng Zhao was forced to step down and the company ordered to pay $4 billion in fines. I would have thought more selling pressure would occur on bitcoin (I don’t think authorities will accept BTC in fines), now 36600, down around 2%.
–As mentioned, Z3/Z4 calendar exactly at -100. In SOFR options 100 wide call spreads are popular. Last one: 0QU4 9625 straddle settled 100. (underlying is SFRU5 at 9624.5, expires 9/13/24). So breakeven 9525/9725. The 9725c, 100 out, settled 19.0 with 23d while the 9525p settled 13.5 with 20d.
–Jobless Claims today expected 225k. Durable Goods and UofM inflation expectations.
Happy Thanksgiving to all.
And they walked away, unscathed
November 21, 2023
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–Solid 20y auction about 1.2 bps through at 4.78% with b/c 2.58. Yields were generally lower in a quiet session, with tens down 1.5 bps to 4.422%. However, front end was weak with twos up a fraction to 4.911%. Weakest SOFR contract was U’24 at 9527.0 (-2.0), but U’25 was +2.0 at 9619.5 and U’26 was +3.5 at 9625.5 (highest point on the SOFR curve). 2/10 ended at a new recent low -49, likely a better long than short from these levels.
–This morning a buyer of 20k SFRH4 9500/9525cs vs 9450p for 1.5 to 1.25 credit. Ref yesterday’s settle in SFRH4 at 9475, the put settled 4.25 and call spread at 2.5. (thanks PNToptions)
–Today’s news includes Chicago Fed National Activity and Existing Home Sales, expected 3.9m, below the Covid low. At the start of 2022 sales were about 6.3m and have trended lower ever since. 10y TIPS auction at 1:00 EST followed in an hour by FOMC minutes. NVDA reports after the bell. Expected EPS $3.39 on revenue $16.11b.
–Asset prices often decline when rates go up. You know, what they call “an inverse relationship”. Here’s an example cited by @TripleNetInvest: Washington DC office building sold for a shocking 77% discount to the price it traded in 2016. Sold for $21 million or $109 sqft, vs $72m in 2019 and $93m in 2016. Isn’t Washington where they’re churning out all the money?
–I don’t know if this particular ‘alternative strategy’ had any CRE assets, but Blackstone is closing a ‘multi-strat fund’ after assets dropped nearly 90% on a negative 2% return since the beginning of 2020. Maybe that ‘inverse relationship’ had something to do with it.
“This is a small, legacy fund. We are in talks with clients to move their capital to newer strategies that offer greater flexibility than the current structure allows,” FT quoted Blackstone as saying.
Of course it’s a small fund jackass. It’s lost NINETY PERCENT of assets. But that’s a very kind offer to help the remaining investors into a NEW and IMPROVED strategy.
–Amy Nixon was kind enough to highlight this excerpt from Moody’s recent negative outlook on the US (and related warnings about US banks). This is from Nov 14:
Moody’s negative outlook on bank debt reflects “the potentially weaker capacity of the government of the United States of America (Aaa negative) to support the U.S.’s systemically important banks,” analyst Peter E. Nerby said in a research note published late Monday. (Morningstar)
–Powell makes it a point to note that the US banking system is sound and resilient at nearly every appearance. The CRE crack-up is perhaps telling a different story about loan assets. Tell a lie long enough…
–Here’s a little metaphor for the US financial & political system.
And they walked away, unscathed.
You have two investment choices: Blackstone and Lockbit. Who is a better steward of your capital?
November 20, 2023
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–Curve continued its flattening trend in November. 2/10 started the month around -18 and ended Friday at -47. On the SOFR curve red/green pack spread settled at -17.625 on Nov 1, and was -29.875 on Friday (9592.375/9622.25). Red pack is one year forward starting with Dec’24. The green pack starts with Dec’25 and is the highest point on the curve at a yield of around 3.75%. Although deeper inversion signals a stingy central bank, there are still lots of call spreads being bought on SFRH4 and SFRM4.
–From WSJ regarding the value of Signature Bank assets:
“A venture of two nonprofits and Related Fund Management is poised to win an auction for billions of dollars of Signature Bank loans backed by New York apartments, according to people familiar with the matter.
The venture’s leading bid of less than 70 cents of the loan’s face value shows how much the value of New York’s rent-regulated apartment sector has deteriorated in recent years.”
–I suppose it’s fitting that non-profits “won” this particular auction, though another pool of commercial property will likely fall into the hands of Blackstone. Is it cagey negotiating to buy these assets at 50% on the dollar, or is it an uncomfortable admission that the assets currently on your books need to be marked down to market?
–20 year treasury auction today. The 5 bp tail in the 30y earlier this month was explained away by the ICBC hack. (Subsequently the Lockbit hacking group said “They paid a ransom. Deal closed.”). I wonder if there will be an excuse today. Then again, maybe Lockbit will emerge as a strong bidder for the safety of treasuries as the organization seems to be generating admirable free cash flow.
https://www.reuters.com/technology/cybersecurity/icbc-paid-ransom-after-hack-that-disrupted-markets-cybercriminals-say-2023-11-13
Leaning Gently Towards Ease
November 18, 2023
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Tweet by Bill Gross on Friday, November 10.
“The best interest rate trade is to bet on a disinversion of the curve. The US economy needs a positive curve to grow as fiscal stimulus wanes. The curve can disinvert by 10 year notes going up, 2 years going down, or both. But a year from now the current negative spread of 40 bps will be positive.”
In the week since the Gross tweet above, 2/10 fell by about 5 bps to -46.8 on Friday. However, on the longer term chart above that move is simply noise. On a technical set up, there’s a double bottom from just before the regional banking jolt in March at -109, which was subsequently retested in July. The intervening high range of -57 to -40 should now act as support. The halfway point between the 2021 high of +157 and the low of -109 is -24, which is near the same level as when the first rate hike occurred in March 2022. (FF midpoint target in yellow).
An inverted curve is a sign of a tight central bank, and despite the good CPI news last week, the Fed does not want to portray an easy posture with inflation still above target and a Federal Gov’t that shows little inclination towards fiscal restraint. However, as Michael Ashton (@inflation_guy) notes in his Quarterly Inflation Outlook :
Inflation is coming down, but is not likely to reach the Fed’s goal very quickly. Unemployment is rising. The Fed’s dual mandate goals are therefore in conflict. The difficult part of monetary policymaking has just begun.
The market respects this view. There are a lot of trades being placed for the possibility of easing in the new year, but they are mostly in the form of clearly defined risk/reward call structures (more on that below). In terms of the Fed Funds futures ‘forecasts’ for rates, note the following spreads:
January’24/January’25 spread settled -92.0. FFF4 settled 9467.0, exactly at the current Fed Effective rate of 5.33% while FFF5 settled 9559.0, not quite 100 bps lower in yield. There is an FOMC meeting Jan 31, so odds for a Fed move at that meeting are clearly embedded in the Jan/Feb spread. FFF4 settled 9467 and FFG4 settled at the exact same price, i.e. unchanged policy. The Feb/April spread isolates the March 20 FOMC. That spread settled 9467.0 vs 9474.0 or -7 and traded as low as -8.5 last week. So around a 30% chance of a March ease of 25 bps. Beyond that, April/May spread captures the May 1 FOMC, prices are 9474.0/9585.0 or -11. May/July for June 12 FOMC, 9485.0/9499.5 or -14.5. July/Aug for July 31 FOMC, 9499.5/9513.0 or -13.5. All around 50/50 for 25 bp eases.
The five-year note yield fell about 21 bps last week to 4.45%. On the SOFR curve, the largest change was SFRZ5, up 24 bps to 9622.0. The 2026 SOFR contracts are the high point of the curve, with settles from 9622.5 to 9621.5, or 3.78%, but these contracts are more than two years forward.
On Friday, the theme of targeted Fed ease trades continued. As examples:
BUYER 25k SFRF4 9468.75/9475/9493.25/9500 c condor from 2.25 to 2.5. Max settle value is 6.25 bps between the two center strikes, and underlying SFRH4 settled 9476.0. Ideal outcome is that perceived easing in Q1 stays right around current levels. Expiration on Jan 12 is well before the Jan 31 FOMC.
BUYER 7k SFRM4 9500/9550c 2×3 for 13.5 to 14.0. Settled 12.75 (30.0/15.75) ref 9500.0. Same traded in May for 16.0. Breakeven in June using 14 is 9622 which is currently the peak level on the SOFR curve, as mentioned above. SFRM4 settled Friday 9500.0.
BUYER 20k SFRM4 9512.5/9537.5/9562.5c fly for 2.5. Max value of 25 with a settle of 9537.5, consistent with about 75 bps of ease (SFRZ3 currently 9462.5).
Since Q4 2022, the ten year breakeven, treasury – tip yield, has been between 2.55% and 2.10%. Last at 2.27%, pretty close to the Fed’s 2% target. The Treasury auctions 10y tips on Tuesday. The current 10y tip is 2.16%. This ‘real’ yield had been negative in the two years from 2020 to 2022, finally moving decisively above 0 in May 2022, around the time of the second Fed hike, which was 50 bps, taking the target to 0.75-1.00%. The cap has been just above 2.5% this year.
On Monday the Treasury auctions $16b of 20 year bonds. This is the high point on the treasury curve. Late Friday w/I was 4.785%. A poor 30-yr auction on November 9 saw the yield jump to 4.77%, but since then 30s have reversed the move to come back down to 4.59%, the lowest since late September. The 20-yr might still be an important gauge of demand.
| 11/10/2023 | 11/17/2023 | chg | ||
| UST 2Y | 506.0 | 490.5 | -15.5 | |
| UST 5Y | 466.4 | 445.1 | -21.3 | |
| UST 10Y | 462.8 | 443.7 | -19.1 | |
| UST 30Y | 473.2 | 459.2 | -14.0 | |
| GERM 2Y | 306.6 | 296.4 | -10.2 | |
| GERM 10Y | 271.7 | 258.8 | -12.9 | |
| JPN 20Y | 154.9 | 146.7 | -8.2 | |
| CHINA 10Y | 264.8 | 265.8 | 1.0 | |
| SOFR Z3/Z4 | -81.0 | -97.3 | -16.3 | |
| SOFR Z4/Z5 | -57.5 | -62.5 | -5.0 | |
| SOFR Z5/Z6 | -1.0 | 0.5 | 1.5 | |
| EUR | 107.18 | 109.20 | 2.02 | |
| CRUDE (CLF4) | 77.15 | 76.04 | -1.11 | |
| SPX | 4415.24 | 4514.02 | 98.78 | 2.2% |
| VIX | 14.17 | 13.80 | -0.37 | |
Falling Bond Yields
November 17, 2023
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–For the past three sessions, 108-30 to 108-31 proved to be strong resistance in TYZ3, as if there was a large standing sell order at that level. This morning TYZ3 prints 109-05 and appears poised to build on the ripping CPI rally from Tuesday.
–Yesterday, the ten year yield fell 9 bps to 4.443%. On the SOFR curve, March’24/March’25, the most inverted one-year calendar, tested a new recent low at -117.5, but didn’t quite make it, closing down 7.5 on the day at -117 (9477.5/9594.5). However, the one-yr calendars just behind, M4/M5 and U4/U5 did make new recent lows at -109 and -88. The market now seems more hesitant to price aggressive easing in any given period, but rather is stretching perceptions further out the curve, as if the Fed is likely to be stingier with cuts over a longer arc of time.
–While the Dec FOMC is decidedly priced as another pause, the FF curve gives hints for the next couple of meetings. FFF4/FFG4 (Jan/Feb), prices the Jan 31 FOMC and settled -0.5, (9467.0/9467.5) so there is little expectation of ease there. However, FFG4/FFJ4 captures the March 20 FOMC and settled -8 (9467.5/9475.5) so near a 1/3rd chance of a 25 cut priced there. FFF4/FFF5 settled -98.5. Four 25 bp cuts over next year?
–From Cass Transportation yesterday:
The for-hire freight market continues to bounce along the bottom of the economic cycle that started 22 months ago. Shipping volumes hit a cycle low in October. Truckload linehaul rates are at their lowest, and our measurement of the average cost of a shipment, our inferred freight rates, is just above last month’s low point.
–Housing Starts today. Goolsbee speaks at 9:45.
Premium sale for a coast into Thanksgiving
November 16, 2023
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–After Tuesday’s explosive rally following weaker than expected CPI, rate futures fell back yesterday. For example, On Tuesday SFRZ4 jumped 27 bps from 9543.5 to 9570.5, but yesterday gave up nearly half of that gain, closing -12.5 at 9558.0. The ten year yield rebounded 9.3 bps to 4.533%. With the major inflation news out of the way, and an upcoming holiday week light on data, vol was hammered. TYF4 atm 108.0 straddle was 2’13 Monday; atm 108.5^ was 2’05 yesterday. In SOFR the Dec 9462.5 strike has been pegged to carry us through the rest of the year. On Monday the atm 9456.25 straddle was 10.75 and yesterday the 9462.5^ settled 4.75 ref 9462.25. Still 30 calendar days to go.
–A block trade early this morning sets the theme, 20k exit sale of 0QZ3 9550/9525/9487.5 put fly at 5.0. SFRZ4 is underlying, 15-Dec expiration. Yesterday’s price pull back allows a more graceful exit of short positions.
–Philly Fed and Jobless Claims today, along with a few Fed speakers. Claims expected 220k, Philly -8.0 from -9.0 last.
Moody’s outlook underscores economic malaise
November 14, 2023
–CPI today expected yoy 3.1% from 3.7% with Core 4.1 from 4.1 last. NFIB Small Business Optimism is expected 90.5 vs last of 90.8. It’s worth noting that these levels are below the 2020 spike low of 90.9. The low of this year was set in April at 89.0. Have to go back to 2015 to find lower prints.
–After Moody’s revised the US Credit Outlook to negative late Friday, treasury prices slumped into Monday morning. However, that weakness faded into the end of the day. Just looking at FVZ3 and TYZ3 charts, it appears as if bottoms are in place (potential reverse head and shoulders). It’s as if the Moody’s outlook underscores weakness in the US economy. On a short term trade I’d stop out of a long on a close below 107 in TYZ3, but I wouldn’t be surprised by a move towards 110-111 by year-end. TYZ3 settled 107-14.
–Yesterday there was a new buyer of 25k TY week-3 106.25/105.75 ps for 4 (settled 3), hedge for CPI today, and PPI, Retail Sales tomorrow.
Financial Conditions Tighten from Bottom Up
November 12, 2023 – Weekly Comment
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This post concerns potential tightening of financial conditions from a layer or two below the obvious surface markers. We typically think of the Fed’s definition of financial conditions as comprised of short and long term interest rates, the value of the dollar, the equity market, and credit spreads. The items listed below can impact all of those categories, but are a level or two lower and may give an early warning before feeding into broader public awareness of tightening.
Inspiration for this note comes from this specific link from @JG_Nuke and @m3_melody
https://twitter.com/JG_Nuke/status/1722361440357462275
The video link above includes several news stories from last week that are perhaps under the radar but could significantly tighten financial liquidity. I have sourced every story and provided some links at bottom.
The big and obvious events from the previous week were Powell’s comments -which flattened the curve- and the awful 30-year treasury auction. On Friday afternoon, Moody’s put the US on notice for downgrade.
Below are other concerning news stories, primarily related to mortgages/agencies:
1) Freddie Mac to temporarily halt dealmaking with Meridian Capital.
Full details of the investigation were not immediately clear, but as [Meridian is] one of the biggest commercial mortgage brokerages in the United States with a robust portfolio of agency multifamily originations, there could be far-reaching impacts for the industry. After all, in 2022, Meridian took the crown for the most Freddie Mac and Fannie Mae (FNMA) originations through lenders for the seventh year running.
2) Mr. Cooper mortgage servicer hacked; mortgages temporarily couldn’t be paid or accessed. Largest holder is Blackrock at 16.7%.
Mr. Cooper, the largest home loan servicer in the United States, says it found evidence of customer data exposed during a cyberattack disclosed last week, on October 31.
The home loan servicer says it has a customer base of 4.1 million and is managing loans totaling $937 billion, according to Q3 2023 results reported in October.
3) Fannie Mae subjects broker-involved agency loans to pre-review. This is analogous to banks tightening lending standards to make sure correct documentation is in place, and to guard against fraud.
4) DTCC notification MBS-1280 23 from November 6, 2023 (linked at bottom). This is like higher margin requirements for MBS.
5) Banks will have more limited access to FHLB funding. This source of funding got a lot of banks over the hump during the March-May banking issues. Expect to see a lot more direct discount window borrowing.
US Calls For New Limits To Wall Street Bank Backstop After March Crisis (BBG)
November 7 – Bloomberg (Austin Weinstein): “US officials will seek to limit access to Federal Home Loan Banks after failing lenders turned to the $1.3 trillion system in desperate bids to survive March’s banking crisis. The Federal Housing Finance Agency will try to push FHLBs back to their roots in housing finance, and away from serving as lenders of last resort to troubled banks, according to a report
6) ICBC, Industrial and Commercial Bank of China, the world’s biggest bank, was hacked Thursday, with some saying that event contributed to Thursday’s weak US 30y auction (which featured a huge 5.3 bp tail). The alleged hacking group is known as LockBit. (BBG) A cyber-security expert said “The founder of LockBit runs it as if he were Steve Jobs, which is successful for them but very bad news for the rest of us.” More frequent ransomware attacks on payment infrastructure systems can contribute to illiquidity.
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Economic data this week includes CPI on Tuesday, expected 3.3% yoy from 3.7%. Core expected 4.1 from 4.1. PPI on Wednesday expected 1.9% yoy from 2.2% with Core 2.8%. Retail Sales also Wed, expected -0.1 to -0.3% mom, from +0.7%. Philly Fed Thursday.
Interesting tweet from Bill Gross:
“The best interest rate trade is to bet on a disinvertion of the curve. The US economy needs a positive curve to grow as fiscal stimulus wanes. The curve can disinvert by 10 year note [yields] going up, 2 years going down, or both. But a year from now the current negative spread of 40 bps will be positive.”
2/10 ended Friday at -43.2 (5.06 and 4.628). Issues relating to mortgages and agency debt could hasten the first Fed cut.
Below is an image of the Fed trying to keep track of various economic agents.
OTHER THOUGHTS/ TRADES
On the week, SFRZ4 and SFRH5 were the weakest contracts, settling 9540.5 and 9565.5 both down 28. The two-year note jumped 23 bps to 5.06%.
However, popular trades Friday continue to target easing into the new year.
BUYER 30k SFRF4 9468.75/9475.0/9481.25/9487.5 for 1.25 (Settled there ref SFRH4 9466.0)
BUYER 25k SFRH4 9475/9500/9525c fly 1.5 (Settled there ref SFRH4 9466.0). FOMC is March 20, after options expire on March 15. Best outcome is for highly expected 25 bp eases starting in March.
BUYER 10k SFRU4 9525/9550/9575/9600c condor vs sell 9350p, 0.5 credit. Condor settled 2.25 and put 3.0 ref SFRU4 9513.0
There are already similar structures in April and June options. The 100 bp wide call spreads in March and June are still open but seeing less action. I continue to like short FFF4/FFJ4 calendar to capture an ease at either/both Jan 31 and March 20 FOMCs, settled -0.5 (9464.5/9465.0). I would have been short already at -3.0.
| 11/3/2023 | 11/10/2023 | chg | ||
| UST 2Y | 483.0 | 506.0 | 23.0 | |
| UST 5Y | 448.6 | 466.4 | 17.8 | |
| UST 10Y | 454.0 | 462.8 | 8.8 | |
| UST 30Y | 474.0 | 473.2 | -0.8 | |
| GERM 2Y | 296.1 | 306.6 | 10.5 | |
| GERM 10Y | 264.5 | 271.7 | 7.2 | |
| JPN 20Y | 169.0 | 154.9 | -14.1 | |
| CHINA 10Y | 266.7 | 264.8 | -1.9 | |
| SOFR Z3/Z4 | -106.5 | -81.0 | 25.5 | |
| SOFR Z4/Z5 | -51.0 | -57.5 | -6.5 | |
| SOFR Z5/Z6 | 5.5 | -1.0 | -6.5 | |
| EUR | 107.32 | 107.18 | -0.14 | |
| CRUDE (CLZ3) | 80.51 | 77.17 | -3.34 | |
| SPX | 4358.34 | 4415.24 | 56.90 | 1.3% |
| VIX | 14.91 | 14.17 | -0.74 | |
https://www.dtcc.com/-/media/Files/pdf/2023/11/6/MBS1280-23.pdfhttps://blinks.bloomberg.com/news/stories/S3XI5PDWX2PS
