“Just close the f’ing door”
November 10, 2023
–I don’t know if Powell actually uttered those words when confronted with climate activists yesterday, but it sure sounded like it. On the other hand, he continues to close the door on those looking for a quick pivot toward ease. I think everyone agrees that policy is currently restrictive, but Powell quantified it by noting FF at about 5.3% while forward inflation expectations are more like 3%, yields a real rate of around 2.3%. Restrictive. Note that U of Mich 5y inflation expectations are being released today, at 3%, and the ten year tip breakeven is currently 2.35%. When asked about Fiscal policy working at cross currents with the Fed’s monetary policy, Powell was quick to say he doesn’t comment on fiscal affairs [except that he recently pulled no punches in describing the fiscal house as unsustainable]. Lorie Logan (Dallas) speaks this morning.
–Yields soared yesterday as the 30y auction tailed by 5.3 bps, 4.716% pre-auction vs actual 4.769%. At futures settle the wi was 4.77/76.5. Most yields up 10 to 12 bps. Ten year +12 to 4.628. Though there were some that said a ransomware hack on ICBC might have had something to do with poor results, the October 30y auction had also tailed, by about 3 bps. Note that the Week2 110 put, expiring today, was significantly exited by the long. Open interest fell 20k, still 22k open, settled at 2’30, intrinsic vs 107-17. Buyer yesterday of 25k SFRJ4 9525/9537.5cs for 2.75. SFRM4 settled 9488.5. Trade needs cuts of around 3/4% to fill in
–The ransomware attacks seem to be coming more frequent and sophisticated, and are likely a real threat to liquidity. And allegations of fraud go hand-in-hand with hacks, a development that seems to be impacting the mortgage market currently. Navigate around on the Treasury-Direct site for a while (now that the public en masse have opened treasury accounts) and ask yourself if it could possibly be vulnerable to a hack. Just close the f’ing door…now that all the bonds have scurried out the back way…
–Chart below is vehicle miles traveled. While we’re often reminded that data points now exceed pre-pandemic levels, miles driven hasn’t. WFH? Maybe.
https://fred.stlouisfed.org/series/M12MTVUSM227NFWA
Flatter curve going into Powell and 30y
November 9, 2023
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In the year 2525, if man is still alive
If woman can survive, they may find
In the year 3535
Ain’t gonna need to tell the truth, tell no lie
Everything you think, do and say
Is in the pill you took today
–In the year 2525, Zager and Evans
–Main feature of Wednesday’s trade was a flatter curve. 2y yield rose 1.7 bps to 4.932% and 10’s fell 4.8 bps to 4.521%. Ten year auction had minor tail, 4.519 result vs 4.511. New lows in a few near SFR one-year calendars, for example SFRM4/SFRM5 fell 5 bps to a new recent low of -105.5. The most inverted 1-yr remains H4/H5 at -111.5 yesterday. The Fed has remained steadfast that easing is not likely any time soon, a theme that Powell will almost certainly reinforce in comments today beginning at 2:00pm. Given the increase in bankruptcies and delinquencies, the idea of 100 bps of ease over a given year is fairly modest. It appears as if that’s led to more of a reach for longer dated paper, which flattens the curve and encourages stock market cheerleaders to blather on about the Santa rally, even as headwinds for future earnings pile up.
–Thirty year auction today. WI was 4.645% at futures settlement.
–Yesterday there was a buyer of 20k SFRZ3 9568.75c for 0.75 covered 9562, synthetic price 0.7. Over 100 bps away with a bit over a month to go, and remember one-YEAR calendars are only around -100. I checked SFRZ3 SFRZ3 9468.75/9487.5/9587.5 c tree and got flat bid for the two calls!! (Settles 1.50/1.25/0.50). So one could buy a call spread 7 out of the money, 18.75 wide and sell another call 100 higher for zero premium. Wow.
–In treasuries, the in-the-money put buyer was back, looks like he rolled ~45k Wednesday week-2 110 puts into Week-2 Friday 110 puts. The latter position settles tomorrow. Settled 1’44 ref TYZ3 108-105. (intrinsic is 1’43).
A chance to replenish SPR
November 8, 2023
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–Crude oil continues to slide lower. Yesterday CLZ3 down 3.45 to 77.37 and this morning it is 76.65.
–Good three year auction yesterday but 10s today and 30s tomorrow will likely be more challenging. Last month’s ten year auction was at 4.61%; when-issued was 4.555/4.50% at futures settlement time yesterday. Powell slated to give opening remarks this morning at 9:15 at the Research and Statistics Centennial (“We can make one hour feel like 100 years”). Ten year yield yesterday was down 9.5 bps to 4.569%.
–Consumer Credit was about as expected at $9.06b, but the NY Fed had this clip relating to increased delinquencies:
The transition rate into delinquency remains below the pre-pandemic level for mortgages, which comprise the largest share of household debt, but auto loan and credit card delinquencies have surpassed pre-pandemic levels and continue to rise. While the growth in auto loan delinquency has appeared to moderate over recent quarters, credit card delinquency rates have risen at a sharper pace. Even though the increase in delinquency appears to be broad based across income groups and regions, it is disproportionately driven by Millennials, those with auto or student loans, and those with relatively higher credit card balances.
[shouldn’t be too surprising; St Louis Fed says Comm Bank Interest on Credit Cards Assessed Interest is a whopping 22.77%]
https://fred.stlouisfed.org/series/TERMCBCCINTNS
–SFRX3 settled yesterday at 9463.0. SFRZ3 at 9462.0. SFRZ3 9462.5^ has compressed from 9.0 on Friday to 7.0 yesterday. With over a month to go SFRZ3 9462.5 call settled 3.25 (and according to SFRX3 should end up at least 0.5 in the money), while 9550c settled 0.75 and were 0.5/1.0 yesterday. 1×4 flat with a bit over a month to go?
–There are more targeted SOFR bets being placed. Example, +10k SFRF4 9468.75/9475/9487.5/9493.75 c condor for ~1.25. Breakeven 9470 and 9492.5, max gain 5 bps. Requires perception of ease. (Jan expiry on SFRH4 underlying).
+25k SFRJ4 9518.75/9537.5/9562.5/9581.25 c condor for 2.0. April expiry on SFRM4 underly which settled 9499.5. Sweet spot between 9537.5 and 9562.5 suggests about 75 bps worth of cuts. EFFR currently 5.33%, cut of 75 should be 4.58% or 95.42. There are FOMC meetings on May 1 and June 12 after April option expiry which will affect the SFRM4 price, so this trade may be predicated on the idea of 25 bp cuts in Jan and March, with relatively high odds of 25 cuts at the next two FOMCs.
Thrill of Victory, Agony of Defeat
November 7, 2023
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–Rate futures gave away much of Friday’s surge. For example, TYZ3 settled 107-155 Thursday, 108-115 Friday and 107-19 yesterday. Open interest down 53k in TY. Open interest also fell 36k in SFRZ3 as large sales from a few days ago at 9456 exited, SFRZ3 settle 9461.5.
–I’m not surprised about WeWork, the gig economy darling, declaring bankruptcy, but Chicago area icon Victory Auto Wreckers closing its doors? Now there’s an economic hit. Everyone knows this ad:
Victory, started in 1945 by WWII vets, bought by the current owner in 1967. Apparently the kids don’t want to take it over. The commercial is a metaphor for today’s economy. The doors are falling off.
–Crude oil (CLZ3) sub-80 this morning for the first time since August. Reuters cites weak China numbers and demand.
–Trade balance and Consumer Credit today. Three-year auction.
https://www.federalreserve.gov/data/sloos/sloos-202310.htm
| The October 2023 Senior Loan Officer Opinion Survey on Bank Lending PracticesThe Federal Reserve Board of Governors in Washington DC.www.federalreserve.gov |
In a set of special questions, the October SLOOS asked about banks’ reasons for changing standards or terms for loans across all loan categories over the third quarter. The most frequently cited reasons for tightening standards, reported by major net shares of banks, were a less favorable or more uncertain economic outlook; a reduced tolerance for risk; a deterioration in the credit quality of loans; concerns about funding costs; a deterioration of customer collateral values; concerns about the adverse effects of legislative changes, supervisory actions, or changes in accounting standards; concerns about deposit outflows; and a deterioration in or desire to improve their liquidity positions.
Among the banks that reported easing lending standards over the third quarter, the most frequently cited reasons were an improvement in the credit quality of loans and a more favorable or less uncertain economic outlook.
In comparison to large banks, other banks more frequently cited concerns about deposit outflows, funding costs, deterioration in or desire to improve their liquidity positions, and concerns about declines in the market value of fixed-income assets as reasons for tightening lending standards.
Pricing towards ease
November 6, 2023
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–Huge rallies in stocks and bonds Friday on a weak employment report. Ten year yield down over 12 bps to 4.663%. SFRH5 and M5 were both up 20 on the day, straddling 4% (H5 9593.5, M5 9610.0. New low in the near calendar spreads. The lowest one-year calendar is SFRH4/H5 at -116, down 11 on the day. The most inverted 3-month spread is SFRM4/U4 at -32.5 (9506.5/9539.0).
–Midcurve Nov SOFR options expire Friday. 0QX2, 2QX3 and 3QX3 straddles (midcurves on Z4, Z5 and Z6) are 17 to 19. 2QX3 9625^ settled 19 vs 9619.5 on Dec’25. This is the highest point on the SOFR curve with a yield of 3.805%. High premium, yet Z5 was up 18 on Friday alone. FVZ3 atm 105.75^ settled 1’005, which is 24-25 bps with three weeks left.
–KOSPI up 5.7% today as S Korea apparently banned short selling. That’s one way to support markets…
–The ad I clipped below from Vanguard sort of struck me today. Subtext is that they do better than individuals just opening their own Treasury-direct accounts. Obviously they see clients moving away. When do those funds come back in? Druckenmiller and Gundlach have already advertised t-bills and 2-yr notes. Doesn’t take much in the way of ‘active management.’
–Three, ten and thirty year auctions this week. These did not go well in October and we’re now at lower yields. FOMO in the treasury market? Or fear of being buried in an avalanche of continued supply?
The Labor Market Has Turned
November 5, 2023 – Weekly Comment
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Chart below is the unemployment rate and the midpoint of the FF target range. It’s clear from the chart that the UE rate is a lagging indicator. It generally declines even as the Fed is hiking, then changes all at once. When the unemployment rate makes a new high over the previous 12 months, as it did on Sept 1 at 3.8%, it generally signals a change in trend. On Friday the rate was 3.9%. I am going to guess that by somewhere in the first half, the unemployment rate will cross the FF mid-range rate. And that’s almost certainly going to be above 5%.
The chart below is SFRH’24/SFRH’25 one year calendar overlaid with the constant slot 2nd to 6th quarterly spread. Obviously, since the September IMM date, the spreads are one and the same. I focus here because this spread is the most inverted on the strip at -116, down an astonishing 11 bps on Friday (9477.5/9593.5). The deepest inversion of any one-year calendar was in May after the regional bank flare-up, where the lowest settle was -192 (1st to 5th). At the current level of -116, H4/H5 indicates about 4 or 5 eases over the year in question. Rarely does the spread turn out to be ‘right’, I would say that perhaps 175 bps is a more appropriate guess for easing to come…but that’s just my guess. FFF4/FFF5 settled at -101.5 (9465.5/9567.0) indicating rate cuts totaling 1% next year.
Obviously the panic -192 print in May was nowhere close to being correct. At that time, it was the first one-year spread, June’23/June’24, and there has not been an ease yet, nearly halfway through the period. However, there are significant bets for sub-4% rates reflected in SFR call options, as detailed below.
A few notes about SOFR options. Some positions are quite large, especially in SFRZ3, where option expiry is 15-Dec. SFRZ3 settled 9462.0, +3.5 on the week. Open interest on the contract is 1.6 million. The 9462.5 c has 443k open and settled 4.5. The 9512.5c settled 1.25. All call strikes from 9462.5 to 9512.5 have total open int of 2.537m. From PNT Options on X:
Above I referenced sub 4% rate plays, most obvious in SFRH4 and M4 options relating to 9600/9700 call spreads. Most of these spreads were bought 8-13 bps. These strikes are the peak open interest levels.
SFRH4 settle 9477.5. 9600c 7.75s OI 283k. 9700c 3.75s OI 256k. CS settle 4.0
SFRM4 settle 9506.5. 9600c 17.25s OI 259k. 9700c 7.75s OI 239k. CS settle 9.5
SFRU4 settle 9539.0. 9600c 34.75s OI 60k. 9700c 16.75s OI 58k. CS settle 18.0 and SFRU4 9625/9725cs has similar size open, settled 15.75.
On the week the ten-yr yield dropped 29 bps to 4.554%. The thirty year ended the previous week at 5.02% and fell over 27 bps to 4.747%. In addition to weakness in Friday’s employment report, the Treasury’s borrowing plans for the quarter were lower than expected, ISM Mfg was only 46.7, and the FOMC press conference was interpreted as dovish. SPX soared nearly 6% on the week.
This week features auctions of 3s, 10s and 30s. Last week I noted that all had tailed in the October auctions and yields popped after a poor thirty year: “At the October 12 thirty-yr bond auction the yield jumped after weak results (3.7 bps tail to 4.837, low bid/cover). At futures settle the 30y yield was 4.87%, up 14 on the day. The next 30y auction is November 9, preceded as always by threes and tens. On Friday, October 27, the 30y yield was 5.02% at futures settle. (USZ3 109-16, WNZ3 112-17).”
So, last month the yield was about 4.80% on the thirty year going into the auction, a bit higher than Friday’s mark of 4.747%. Perhaps last week’s events have changed sentiment such that demand will actually be much better at lower yields, but I wouldn’t bet on it. Friday’s USZ3 settle was 113-21 and WNZ3 117-19.
Note from msn money citing BofA:
“We expect defaults to continue to accelerate going into 2024,” Bank of America warned in a note on Friday. “From $30bn in DM USD HY impaired face value over the past 12 months, we project the pace to increase 1.5x to $46bn over the next year for a 3.4% default rate.”
Most of those defaults are likely to take place in three areas, the bank said, with an estimated $14 billion of distressed debt showing up in technology, media, and telecom, $13 billion in the health sector, and $8 billion in the cable sector.
| 10/27/2023 | 11/3/2023 | chg | ||
| UST 2Y | 501.2 | 483.0 | -18.2 | |
| UST 5Y | 476.9 | 448.6 | -28.3 | |
| UST 10Y | 484.3 | 455.4 | -28.9 | wi 454.053.5 |
| UST 30Y | 502.1 | 474.7 | -27.4 | wi 474.0/73.5 |
| GERM 2Y | 303.7 | 296.1 | -7.6 | |
| GERM 10Y | 283.2 | 264.5 | -18.7 | |
| JPN 20Y | 166.4 | 169.0 | 2.6 | |
| CHINA 10Y | 272.0 | 266.7 | -5.3 | |
| SOFR Z3/Z4 | -85.0 | -106.5 | -21.5 | |
| SOFR Z4/Z5 | -46.5 | -51.0 | -4.5 | |
| SOFR Z5/Z6 | 10.0 | 5.5 | -4.5 | |
| EUR | 105.64 | 107.32 | 1.68 | |
| CRUDE (CLZ3) | 85.54 | 80.51 | -5.03 | |
| SPX | 4117.37 | 4358.34 | 240.97 | 5.9% |
| VIX | 21.27 | 14.91 | -6.36 | |
5% and 20 bps. Just a normal week
November 3, 2023
*******************
–Big flattener yesterday. Red pack (second year starting with SFRZ4) actually was lower on the day -0.375 at 9577.875, greens +5.375 to 9601.25, blues +10.625 to 9593.875, and golds +12.375 to 9577.25. Reds and golds are identically priced ~4.25% while greens and blues are closer to 4%.
–Since Monday SFRH4 is +3 to 9468.5, while SFRH7 is +21 to 9596.0. A lot of ~20 bp moves in longer maturities, for example tens from 4.856% on Monday to 4.667% yesterday.
–NFP today expected +180k with Avg Hourly Earnings yoy 4.0% from 4.2%.
–On Friday ESZ3 settled 4137.75 and yesterday at 4335.75, a gain of 198 points, near 5%.
In the ‘bad news is good news’ department, here are a couple of headlines this morning:
RTRS: Hamburg skyscraper construction halted in grim sign for German property sector
RTRS: Maersk to cut at least 10000 jobs as shipping boom unravels
Chgo Trib: Chicago Mayor Brandon Johnson in Washington to ask for $5 billion in migrant funding
AAPL revenue down four consecutive quarters.
–Of course, the big lead-off article in the press is that SBF was found guilty of defrauding crypto clients and may face 100 years in jail. Translation, he may face a six month delay before joining Jon Corzine in the Hamptons.
Powell’s easy
November 2, 2023
********************
–Powell said the Fed is not thinking at all about cutting rates, and the question the Fed is asking is should we hike more. The market digested that, along with other comments, and concluded: FED PIVOT!! Rate and equity futures soared during the FOMC press conference. On the SOFR curve SFRH5 (red March) was the strongest contract, closing +15 at 9574.5 or 4.255%. The most inverted one-year calendar spread is SFRH4/SFRH5, which is now back below -100 bps at -106.5 (9468/9574.5). The most inverted three month calendar is SFRM4/U4 at -29 (9492/9521). So, while easing continues to be priced, the pace is not extreme.
–The prospects for a hike in December have essentially been squeezed out. FFX3 settled 9467.25, right at the 5.33% Fed Effective Rate. Jan’24 FF settled +2 at 9462.5 or 5.375%. April is 9464.5, and is the last contract with a rate above the current EFFR. If one were thinking an ease could happen at the Jan 31 and/or March 20 FOMC, then selling FFF4/FFJ4 is the vehicle. THIS IS NOT A RECOMMENDATION.
–ISM Mfg was expected 49.0 and actual print was 46.7. New Orders expected 49.8 and were actually 45.5. I guess it’s a ‘bad news is good news’ market again. About a week ago a friend whose son started a leather goods company ( https://www.rangeleather.com/ buy your stocking stuffers here!) said that sales in October had fallen way below projection. Just anecdotal evidence of a slowing consumer was my thought. But an article on ZH (citing BBG) confirms the same idea about California’s tax collections:
“As of Oct. 25, just $18 billion had been collected for the month – significantly lower than the $42 billion that had been projected, according to an update by the state’s Department of Finance late Friday. The shortfall is being attributed to the recent stock market slump and slowing wage growth, as the state’s collections are highly dependent on capital gains and personal income tax revenue”.
“…Nearly half of California’s tax collections come from residents in the top 1% of income earnings, Bloomberg further notes.”
Of course, to be fair, tax collections in Texas should probably be included by comparison; I’d guess they’re up.
–News today includes Jobless Claims expected 210k, Productivity and Unit Labor Costs, expected +0.7% fr0m 2.2 last.
There are no guarantees
November 1, 2023
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–A lot going on today to kick off November:
Treasury releases details on compostion of borrowing at 8:30.
ADP at 8:15
JOLTs and ISM Mfg at 10:00. ISM expected 49.0 from 49.0 last
FOMC in the afternoon.
–Quiet session yesterday with main feature being continued flattening (and snow flurries in Chicago). For example, on Friday, SFRZ4 settled 9543.5 and yesterday at 9535.5, a drop of 8 bps in two days. SFRZ6 only went from 9580 on Friday to 9578.5. SFRZ7 from 9568 to 9567, so the back end is holding relatively steady. Is that an indication that Treasury is likely to weight supply to the front end? Or that the Fed will maintain a hiking bias? Perhaps it’s a little of both, though SFRZ4 at 4.645% still reflects an easing bias next year; just less of it.
–On the topic of treasury supply, the only thing to keep in mind is MORE. Druckenmiller says he has a massive bet on 2s. I suppose it doesn’t take a master trader to weigh the benefits of a guaranteed yield north of 5.06% vs SPX ytd 9.6% with a lot more risk. And when I say guaranteed, it’s not like the bonuses given to employees by Guaranteed Rate Mortgage which the company is now trying to claw back. How does that leave ‘Guaranteed Rate Field’, the home of the Chicago White Sox? Look, let’s just go back to reality and call it Comiskey again. On the other hand, with the US Gov’t making every effort to tie its currency to the Argentinian Peso (or is that the other way around?) the 5% coupon may not provide quite as much purchasing power a year or two from now. On the third hand, I suppose I’m glad I sidestepped Zillow, which dropped 7% yesterday after a jury found realtors guilty of collusion. (Who could have imagined that?) Z closed at 36.25 yesterday from 57 in August. I’ll give it a ‘Zestimate’ of 25 by year end.
–In terms of inflation, here’s a tidbit from Almost Daily Grants (piece is about Electric Vehicles, emphasis added):
Elevated replacement costs for e.v. components and a dearth of specialized technicians to troubleshoot mechanical problems further dilute the value proposition for potential customers: average insurance costs rose 72% over the first nine months of the year, data from comparison site Confused.com show, well above the 29% uptick for combustion autos.
72% for EVs and 29% for gas-powered insurance? I’m not sure that 5% coupon is going to cut it.
BoJ tweak. US Treasury borrows.
October 31, 2023
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–Yesterday afternoon Treasury announced borrowing estimates of $776b for Oct-Dec 2023 and $816b for Jan-Mar 2024. Cash balance at the end of both quarters is assumed at $750b, though current TGA is $848b according to the St Louis Fed site. Though Q4 borrowing was lower than expected due to “projections of higher receipts”, Q1 is higher and both are big numbers. Financing details will be released at 8:30 on Wednesday. Yields were marginally higher on the day with tens up 1.3 bps to 4.856%.
–BoJ removed the hard cap 1% yield on JGBs as was leaked by Nikkei during yesterday’s session. Yen has weakened to 150.44. Core inflation forecasts were also revised higher, to 2.8% in 2024. US treasury futures slightly higher with TYZ3 106-13, up 6 at 5:30 EST. China’s Mfg PMI fell to 49.5 vs 50.2 expected, and Service PMI to 50.6 from 51.7 last.
–Early buying yesterday of TY puts: TYZ3 105p 33 to 35 paid for 28k. Settled 28 ref TYZ 106-07. Open interest rose 39k to 89k, the most OI of any TYZ put. Also a buyer of 12k TY Week2 Nov 104.5p for 11-12, settled 9, OI +12k. Week2 options expire 10-November, so these options capture the last leg of auctions next week; the 30y is on 9-Nov.
–Today’s news includes Employment Cost Index expected 1% Q/Q. Chicago PMI expected 45 from 44.1 last.
