“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.
https://www.federalreserve.gov/publications/files/financial-stability-report-20230508.pdf
–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.
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.
Fed postmortem
May 7, 2023
On a week when the Fed raised the Fed Fund target 25 bps to 5.0-5.25%, the strongest SOFR contract on the week was SFRH4 which ROSE 24.5 bps to 9629.5. Therefore, a hike of 25 was met with a drop of 25 bps less than one year forward. The yield on SFRH4 is 3.705%, which is 1.335% lower than that of front June SFRM3 (9496.0).
On the treasury curve, the 2yr yield fell 13.8 bps on the week to 3.922%, but at the opposite end the 30yr rose 8.2 bps to 3.755%.
The takeaways, after some rather volatile trading during the week, are 1) that this is expected to be the last hike out of the Fed 2) therefore, short curve trades which were predicated on consistently higher short term rates are being exited.
In the new Fed statement, the following line from February 1 was omitted: “The Committee anticipates that ongoing increases in the target range will be appropriate…” During the press conference, Powell said the removal of that language was “meaningful.” He also specifically referred to Monday’s release of the SLOOS, or Sr Loan Officer Survey, when asked about the impact of tightening credit conditions related to last month’s revelations that many banks are insolvent mismatched regarding maturities.
I am including the link to the January 2023 SLOOS below (quarterly release). However, this was before the banking discomfort that was experienced in March. It was issued February 6, 2023. Here is the key line:
The January SLOOS survey also included a set of special questions inquiring about banks’ expectations for changes in lending standards, borrower demand, and loan performance over 2023. Banks, on balance, reported expecting lending standards to tighten, demand to weaken, and loan quality to deteriorate across all loan types.
https://www.federalreserve.gov/data/sloos/sloos-202301.htm
What are the bankers likely to say this time? That the better than expected NFP (253k) and historically low unemployment rate of 3.4% has changed minds and now loan quality is improving? Hardly. The key question is how much a credit slowdown will affect growth in the near term. When asked in the press conference to equate credit issues with rate hikes, Powell said the Fed will just have to watch.
In terms of the curve. 5/30 ended the week at +34 bps (3.415% vs 3.755%), having posted a high of 40 on Thursday. These are the highs since early March 2022, just prior to the Fed’s first hike. Below I have added a chart of 5/30 (blue) vs the 2nd red to 2nd blue SOFR, currently SFRU4 vs SFRU6 (white). SFRU4/U6 settled -14.5, also the high since before hikes began. [NOTE: BBG inexplicably uses March’24 as the first red; should be June’24].
These spreads track fairly closely, and it’s worth noting that on Thursday, two 15k blocks of SFRM4/SFRM6 were bought at -38 and -29.5. These trades appear new as open interest in SFRM6 rose to a fresh high of 124k (+16k on the week). The M4/M6 spread settled -45.5, significantly lower than the above cited trades. In Q1 2021, the 5/30 spread was as high as 163. The demise of SVB (and oozing contagion) appears to have marked the end of curve flattening in the US.
DXY closed near the low of the year at 101.21. The high in Sept of last year was 114.11; the low in 2021 was 89.68. Weakness in USD is another hint that the Fed is done. Next target in DXY should be around 99. Perhaps it’s worth mention that some commodities notched end-of-week bounces off depressed levels; it’s a bit early to call a commodity bottom, but bears watching.
Another sidenote concerns China’s 10y yield which ended at a new low for the year at 2.74%. At the beginning of March it was 2.93%. I would consider the ten-year yield to be a red flag to those that think China’s re-open will lead to a burst of sustained growth.
After SLOOS on Monday, the Treasury kicks off auctions of 3s, 10s and 30s starting Tuesday. CPI is Wednesday, followed by PPI Thursday. CPI yoy expected 5.0%, same as last month. Core yoy expected 5.5% from 5.6% last. The Fed Effective rate was 5.08% on Thursday post-Fed, so that rate is now likely to exceed headline CPI for the first time since 2019. Recall the last Fed hike cycle ended in December 2018 at 2.25-2.50%. CPI high in mid-2018 was 3% but had retreated to 1.9% by year-end. The first ease was in July 2019, seven months after the last hike.
OTHER THOUGHTS
Last week pre-Fed I suggested sell FFM3/FFQ3 calendar -2.5. Settled -9.0 as FFM3 closed Friday at 9493.0, essentially equal to the new EFFR of 5.08% while FFQ3 settled 9502. I also suggested buying SFRZ3 9525/9475 p 1×2 for 4.0; settled 8.0 with SFRZ3 up 21.5 to 9576.5, it currently has zero delta. Somewhat interesting to note that the December 50bp put 1×2 that is 50 bps out-of-the-money is +8 (26.0/9.0) while the 9625/9675 call 1×2, approximately equally out-of-the-money, is -18.25 (40.25/29.25) with delta -0.14.
A couple of option trades worth note. New buyer Friday 2QH4 9500/9475ps for 1.5. Settled 1.25 ref 9720 in the underlying SFRH6 contract. Expires 15-March 2024. This put spread is 220 out of the money. Green midcurves in SOFR don’t have a ton of open interest. This trade would benefit from a monster steepener with much higher long rates.
Buyer 40k SFRM3 9493.75/9506.25/9518.75c fly 1.0. Settled 1 ref 9496.0. Currently the lower strike is 2.25 in the money. This trade could hit the sweet spot middle strike if the Fed holds in June, but the market expects an initial ease at the July 26 FOMC.
New buyer on Thursday of 100k SFRN3 9575/9587.5cs vs selling SFRN3 9487.5/9475.0 ps for 1 (call spread over). Settled on Thursday at 1.75 in favor of the call spread, but with Friday’s fall in SFRU3 to 9531.0 (-16.5 on the day), the call spread settled 2.50 and the put spread at 2.25.
| 4/28/2023 | 5/5/2023 | chg | ||
| UST 2Y | 406.0 | 392.2 | -13.8 | |
| UST 5Y | 353.3 | 341.6 | -11.7 | |
| UST 10Y | 344.8 | 344.1 | -0.7 | wi 343.5/43.0 |
| UST 30Y | 367.3 | 375.5 | 8.2 | wi 375.5/75.0 |
| GERM 2Y | 269.1 | 257.2 | -11.9 | |
| GERM 10Y | 231.3 | 229.0 | -2.3 | |
| JPN 30Y | 122.2 | 126.4 | 4.2 | |
| CHINA 10Y | 278.0 | 273.6 | -4.4 | |
| SOFR M3/M4 | -158.0 | -176.0 | -18.0 | |
| SOFR M4/M5 | -62.5 | -50.5 | 12.0 | |
| SOFR M5/M6 | 0.5 | 5.0 | 4.5 | |
| EUR | 110.17 | 111.46 | 1.29 | |
| CRUDE (CLM3) | 76.78 | 71.34 | -5.44 | |
| SPX | 4169.48 | 4136.25 | -33.23 | -0.8% |
| VIX | 15.78 | 17.19 | 1.41 | |
SLOOS
3 – 6 – 3 on 5/5
May 5, 2023
–NFP today expected 180k. Late headline yesterday, FDIC poised to release plan to refill insurance fund…by making big banks pay more. Fixed it.
–Early morning buyer 100k SFRN3 9575/9587.5cs 2.0 vs selling 9487.5/9475ps 1.0. Paid 1 for package, new position. PS settled 1.25. CS settled 3.0. Underlying SFRU3 settled 9547.5, +23 bps on the day. Just need two more days like yesterday and we’re through the upper strike. Easy. Another small trade that perhaps bears notice: a buyer of 500 SFRH5 100c for 10.5 (10.75s). The specter of negative rates.
–I have never seen a hike immediately followed by expectations of ease the very next day. New EFFR is 508 or 9492. FFM3 settled 9496, +4.5 on the day. June FOMC is the 14th. No Fed move means FFM3 settle 9492, and ease of 25 means 9503.3. So 9496 is an approximate 30% chance of ease. Continuing the theme, SFR three month calendars are projecting nearly linear easing over the next year. June/Sept settle -43.5, Sept/Dec -50 and Dec/March -56. All new lows. SFRM3 settle 9504, U3 9547.5, Z3 9597.5 and H4 9653.5. SFRM3/M4 settled at a new low -192, the most inverted I’ve seen a one-yr calendar, while SFRU3/U4 was unch’d at -174.5. Of course, from March 2022 to March 2023 the Fed hiked by 475, and eases usually come faster, not slower.
–New highs in curve trades: Reds to golds soared 18 bps to -13.625, reds +21.5 (9733), greens +10.625 (9736.6), blues +7 (9722.5) golds +3.25 (9701.75). 5/30 now at +44, +13 on the day.
–Every SOFR contract from Sept’24 back has a 97 handle, that is, sub 3% yield. The golden age of banking had a rule, 3-6-3. Pay depositors 3%, lend at 6% and be on the golf course at 3 pm. Perhaps the forward curve can look like that again…
In any case, let’s knock off early at 3 today and enjoy a few cervezas for cinco de mayo.
CORRECTION: yesterday I started off citing prices for SFRM4, but referred to SFRM3, the wrong year. I meant M4
The Captain has turned on the Fasten Seatbelt Sign
May 4, 2023
–Complete melt-up in SOFR futures late in the day and into the new session. SFRM4 low yesterday was 9659, settle was 9668.0. The high on the re-open yesterday afternoon was 9693.5! So the Fed moved the FF target to 5-5.25% and a little over one year forward the M4 contract is consistent with 3-3.25%. The March panic high on SVB was 9714.5.
–In the wake of yesterday’s FOMC, the market is even more convinced that this was the last hike and the next move will be an ease. SFRM3/SFRM4 settled -174.5, now the most inverted one-year calendar and tied with SFRU3/SFRU4 (at settle). SFRM3 settled -5.0 to 9493.5 as it hadn’t priced complete certainty of the 25bp hike, while SFRM4 was +8.0 at 9668.0. Besides saying the banking system is resilient, there was no lifeline for regionals. The latest casualty is PacWest, but there will be more. Facts at ground level are at odds with official pronouncements, but I think we’re all getting used to that. “We pretend to work, they pretend to pay us.” Late in the electronic session M3/M4 trade -184.5, a new low for ANY one-year calendar in this cycle. SFRU3/U4 was -179.0 (this at 3:45 Chicago time).
Implication: the market is moving the EASING timeline forward.
–Astonishingly, FFM3 traded as high as 9498.5 yesterday afternoon. The new EFFR should be 508 or 9492.0. The next FOMC is June 14. At 9498.5, pricing is about 50/50 for an EASE at the next meeting!
–Vol got crushed AS OF SETTLEMENTS. Example, SFRH4 was up 7.5 on the day at 9622.5, but the atm 9625c was UNCH’d AT 60.5.
–5/30 traded at a new high for the year. Late price 36.5. Nearest level was last July at 33.0. Early March high was 51.5.
–Note, with respect to the magnitude of the credit crunch, Powell said it’s hard to equate to rate hikes. However, he did say that the next SLOOS report, Sr Loan Officer Opinion Survey on Bank Lending Practices, will be on Monday, May 8.
Confidence Game
May 3, 2023
–FOMC today. High odds of a 25 bp hike to 5.0-5.25%, but what seemed certain yesterday morning was less so as the day progressed and regional banks were trashed. KRE (regional bank etf)-6.3%. USB -7.0%, KEY -9.4%. All new lows. This stuff’s going down faster than Bud Light sales. New Fed Effective (EFFR) should be 5.08. FFM3 traded as low as 9488 in the morning, or 5.12 but settled 9496.0. There is an FOMC June 14, so at yesterday’s low there were small odds of another hike at that meeting. However, almost all news articles I saw proclaimed that this would be the last hike. Red SOFR pack +19.375 with June’24 the star performer, up 20 bps to 9660 or 3.4%.
–If a bank can’t be certain of its own funding then certainly the loan book needs to be trimmed. It’s boiling down to confidence in the system. Remember when they made all the money market funds based on treasuries, so that they wouldn’t break the buck? Well now the gov’t can’t agree on raising the debt ceiling. Confidence is eroding on many levels. How to restore it? Can’t slash rates in an environment where inflation is still a threat. Guarantee ALL deposits? Might be too late now, because the COST of deposits are now higher; almost everyone knows that AAPL is paying 4.15% with no minimum.
–Fed funds greater than 5%… but yesterday 5’s fell 17.7 bps to 3.454% and 10’s down 14.2 bps to 3.43%. New recent high in 5/30 to 27 bps (3.454/3.724). New recent low in ten year breakeven to 220.7 bps.
–Ironically, Confidence Game is a horse running in the Kentucky Derby. 80 to 1 shot. I’m putting down $100 to win.
https://www.wagertalk.com/news/horse-racing/confidence-game-odds-prediction-derby/#:~:text=Confidence%20Game%20is%20currently%20a,odds%20to%20win%20the%20race1.
What is the origin of Confidence Game’s name?
Confidence Game’s name is a phrase that means a trick or scheme that relies on deceiving someone. The origin of the phrase is uncertain, but it may be related to the word “confidence”, which is a feeling of trust or belief in someone or something.
The phrase may also be a pun on the word “game”, which is a term used in horse racing to describe a horse’s willingness or ability to compete. Confidence Game’s name is fitting for a horse who likes to deceive his rivals and compete with them.
Long bond looks iffy
May 2, 2023
–RBA unexpectedly raised rate by 25 to 3.85%. Janet Yellen warning the US will run out of money in June; maybe JPM can buy it.
–Light May Day volume. Long end of the treasury curve especially weak, though bonds have rebounded this morning, USM3 last at 130-06. The settlement was 129-21, but immediately slid to 129-02. USM3 technically appears to be putting in a top which would target around 124-16.
–5/30 ended at 19. Since the Fed started hiking (and remember, that was only 14 months ago) the range in 5/30 has been just over 32 in July 2022 to a low of -44 on March 7. The most recent high was 25.5 on March 23 amid the banking crisis, which really doesn’t fit the definition of a crisis because the FDIC is going to backstop any TBTF who wants to cherry-pick assets from smaller banks that were crushed by the inverted curve. Seems like the ratings agencies should be looking at downgrading the US.
–May FF settled 9495.75 in front of tomorrow’s FOMC; final settle should be just under 9494.5 on a 25 bp hike.
Failed Risk Controls
April 30, 2023 – Weekly Comment
The Chicago trading floors were famous for funny (and occasionally vulgar, even funnier) nicknames, and I was introduced to that fact shortly after becoming a runner on the Chicago Board of Trade floor. There was a girl that was trading in the bond pit, I don’t recall her name, sort of pretty in a tom-boyish way, with shoulder-length dishwater blond hair, canvas Converse gym shoes. I heard she had gone to an ivy league school…Princeton maybe? But was said to be just a little ditzy. Anyway, the acronym on her membership badge was AFS. Known as: Awfully F’ing Stupid. After all this time, it’s one of my favorites. I can imagine her being instantly christened with that moniker by some Irish kid from Beverly who proudly graduated from Brother Rice highschool and immediately started filling bond option orders.
First Republic Bank. FRC. Appropriate nickname? I went with Failed Risk Controls for the title (sort of tame) but also considered Fed Reduced Collateral and a couple of others. YZ offered up Fed Rate-hike Casualty, and First-Rate Collapse. Faulty Regulator Confidence? Fake Reserves Counted?
Oh, they made a BIG deal of UNINSURED deposits going to FRC. $30 billion from 11 institutions. $5b each from JPM and BofA. Now what? Can’t agree on who gets to pick the meat from the Fetid Rotting Carcass. (Don’t worry, there will be others). I can imagine being JPM involved in negotiations: “Sure, bail-in ALL depositors for 5%. We’ll buy the good assets and probably get at least $250 million in discounts which will cover our bail-in loss. The FDIC can keep the really bad stuff and give us a guarantee on our buys. And we’ll get at least $10 billion in new deposits that we can easily make 2.5% on, because all the new depositors are scared shitless and buying safety, not yield. That’s why we ALREADY have 10% of the nation’s deposit base.”
You know and I know that the problem is not contained. The core issue is that rates went up quickly, assets are worth less, and depositors flee. But what if the bank loans were floating-rate? Then of course, the borrowers have a more difficult time servicing the debt and can more easily slide into the NPL column. You can see it in your own portfolio, with AAPL and MSFT trading like bonds at a record 14% of the market-cap weighted S&P500 and a lot of smaller companies just trading on the fringe. The big just get bigger. F Retail Clients.
(BBG) Former Treasury Secretary Lawrence Summers criticized Washington regulators and US banking giants for not having already figured out a solution for the beleaguered lender First Republic Bank.
“I’m surprised and disappointed that this situation has continued to linger as long as it has, with the bank’s stock down 95%” and credit gauges deteriorating, Summers said on Bloomberg Television’s “Wall Street Week” with David Westin.
“I hope that between the banks, the FDIC, the other public authorities, that the best way forward will be found within the next week or 10 days.”
Isn’t that adorable? The former Treasury Sec’y is surprised and disappointed. And the current Treasury Sec’y just can’t seem to put her finger on what caused the problems. From six years ago in June 2017:
“Would I say there will never, ever be another financial crisis?” Yellen said at a question-and-answer event in London.
“You know probably that would be going too far but I do think we’re much safer and I hope that it will not be in our lifetimes and I don’t believe it will be,” she said.
********************
I listened to Grant’s Current Yield podcast this weekend with guest Harley Bassman. Well worth a 30 minute listen:
https://grantpub.libsyn.com/non-linear-returns?tdest_id=522046
On a macro theme, Bassman thinks the curve may be too inverted given the stickiness of inflation in a service based economy. However, I am going to focus on a couple of other points from the presentation. First, I used to keep a couple of trading cards in my jacket pocket with a bunch of equations and adages that I found important and regularly useful. The several things I would have jotted on those cards from this podcast: 1) the MOVE index divided by 16 is approximately the number of bps the market moves in a day. I.e. a MOVE of 100 equates to around 6 bps per day. 2) Long term average range in MOVE is 80 to 120. 3) mortgages are usually about 75 bps above the ten year treasury yield.
What was quite interesting in the podcast is that Bassman says that current mortgages are about 175 over the 10y treasury, and CHEAP. He perceives NO credit risk. He cites the FNM 5’s which currently yield about 5.2% vs 10y treasuries at 3.45%. (this is just from the podcast, I have not done my own verification). He gives reasons for this pricing, first, high implieds (as expressed by MOVE) and second the severe inversion in the curve. The embedded call option in mortgages (and callable munis) has exploded in value, making the yields on MBS higher than they ‘should’ be. The buyer of mortgages is essentially selling this inflated call to juice up the yield. Bassman’s idea is to buy these mortgages, which he says will rally in price as the curve steepens (becomes less inverted).
Now, in terms of inversion, August 2023 FF contract settled 9494.5 or 5.055%. If the Fed hikes Wednesday, then the new Fed Effective should be 5.08% or 9492, so FFQ3’s price is close enough for government work. FFQ4, another year forward, is 9660.5, a rate of 3.395%, a spread of -166 to FFQ3. As Bassman notes, the market is pricing a hard landing.
On the SOFR curve, the lowest priced contract Is June’23 at 9491.5, again, essentially equal to the prospective new EFFR of 5.08%. The highest contract is SFRZ5 at 9715 or 2.85%. The spread is 222.5 bps. When one looks at nominal midcurve straddle levels, the atm red Sept (0QU3) 9675^ is 93.5 bps, green Sept (2QU3) 9712.5 is 77 bps and blue (3QU3) 9712.5^ is 65.0. My first thought is that buying FNM bonds and buying blue midcurve strangles or covered puts could work as a reasonable hedge. This is not a recommendation, just an initial thought.
If the Fed stops hiking, the curve will almost surely become less inverted. You’ll notice that Summers prominently starts his “hopes” with “BANKS” and adds “other public authorities” to patch the Fear-Related-Cracks in the financial architecture. What helps banks? A positive curve. Here’s a plan: Bail-in depositors. Let a bunch of smaller banks fail and make the big ones bigger, and then start cutting rates so that the curve steepens and the big banks can restore capital and prevent panic. Fixed it.
OTHER THOUGHTS
Harley. Another Harley story? Yes but this one is about Harley-Davidson. Here’s a fabulous BBG headline: Harley-Davidson Says Repo Shortage is Fueling Credit Losses. From the piece:
There are not enough people to repossess all the motorcycles. That was the message from Harley-Davidson Inc., which said Thursday its credit losses in the first quarter were due in part to a shortage of repossession agents.
From an ABC News piece this weekend:
“…Home foreclosure filings have begun to surge. According to data from ATTOM, a property analytics company, US foreclosure filings totaled 95,712 in the first qtr of 2023. That’s 6% higher than in the previous quarter and 22% higher than a year ago.”
Job description: (perfect for someone who has been laid off from a technology company desk job and wants to experience some outdoor adventure). Go repo this guy’s Harley:
| 4/21/2023 | 4/28/2023 | chg | ||
| UST 2Y | 414.0 | 406.0 | -8.0 | |
| UST 5Y | 365.2 | 353.3 | -11.9 | |
| UST 10Y | 357.2 | 344.8 | -12.4 | |
| UST 30Y | 377.6 | 367.3 | -10.3 | |
| GERM 2Y | 292.0 | 269.1 | -22.9 | |
| GERM 10Y | 248.1 | 231.3 | -16.8 | |
| JPN 30Y | 134.1 | 122.2 | -11.9 | |
| CHINA 10Y | 282.9 | 278.0 | -4.9 | |
| SOFR M3/M4 | -145.0 | -158.0 | -13.0 | |
| SOFR M4/M5 | -62.5 | -62.5 | 0.0 | |
| SOFR M5/M6 | -2.0 | 0.5 | 2.5 | |
| EUR | 109.92 | 110.17 | 0.25 | |
| CRUDE (CLM3) | 77.87 | 76.78 | -1.09 | |
| SPX | 4133.52 | 4169.48 | 35.96 | 0.9% |
| VIX | 16.77 | 15.78 | -0.99 | |
Some bonus features:
“Your line of work requires a specialized vocabulary”
Denzel at his best: “… you gotta look around. The ‘rest of us’ is a category you haven’t qualified for in a long time.”
FOMO
April 28, 2023
–BOJ summary from Reuters, “The yen tumbled and Japanese bonds and stock rallied on expectations the BOJ’s new governor [Ueda] would take his time to withdraw the stimulus of his dovish predecessor…” $/yen new high for April over 136. The Argentine central bank was somewhat less timid, hiking by 10 percentage points to 91%.
–SPX soared 2% yesterday, the biggest one-day rally this year since Jan 6. Asset reallocation. AMZN warned of slowing cloud growth post-close. Q1 GDP weak at 1.1% but price data higher than expected. Yields across the US curve jumped. Tens rose nearly 10 bps to 3.524 while on the SOFR curve, SFRH4 plunged 20 to 9603.5. The market shook off lingering doubts about next week’s FOMC with FFK3 settling 9497. On a hike FFK3 should ultimately settle around 9494.4.
Today’s news includes Employment Cost Index expected 1.1%
PCE prices yoy 4.1 vs 5.0 last and Core 4.6 vs 4.6 last.
Chicago PMI expected 43.6 vs 43.8.
–Here’s another brilliant plan for Chicago:
The Chicago Coalition for the Homeless is one of the main backers of a proposal to increase the real estate transfer tax on all real estate transactions over $1 million, to 2.65 percent of the sale price from the 0.75 percent in place now for all deals regardless of price. Called Bring Chicago Home, and often nicknamed the “mansion tax,” it’s been estimated by the coalition to generate an extra $163 million a year that would be earmarked for combatting homelessness.
https://therealdeal.com/chicago/2023/04/27/johnson-elevates-transfer-tax-hike-with-appointments/
From another piece:
[Mayor] Johnson’s plans to hit Chicagoans with higher taxes is likely to speed up the Chicago exodus. Recent polling shows more than one-third of city residents would leave if they could. They cited taxes and affordability among their top concerns.
I got better
April 27, 2023
–Once again new low in FRC, down another 30% at 5.69, as a newsflash stated FRC faces potential curb on Fed borrowing. Interesting tweet from @Convertbond cites LNC (Lincoln Nat’l) as something to have on the radar: CDS new highs; 15% of mkt cap in debt matures this year. Another comment in the thread notes that the big insurers are heavily exposed in CRE. But….look at META! “I got better.” AMZN today.
–Implied vol down in rates, but there continues to be safe haven type trades, for example another 10k bought SFRZ3 9700c 22.5 paid vs 9566.0. (settle 24 vs 9573.5). Ten year yield +3 bps to 3.428%. Red SOFR contracts down avg -5.5 bps.
–Open interest in SOFR options is gigantic relative to futures (but spread across many strikes). Peak open interest in SFRZ3 calls is the 9750 strike with >400k. The bulk of OI is in December options with 4.164m calls and 4.115m puts. All futures OI totals 9.591m. There is simply an enormous amount of time value in options over the balance of this year. For example, SFRZ3 9750c have about $176 million in value. [daily bulletin links attached below]
–5 year auction went well at 3.50% (3.507 just prior to auction). Today includes the 7 year auction. Data: Jobless Claims 248k. GDP Q1 2.0%.
–PCE prices are out on Friday with yoy expected 4.1% from 5.0 last, and Core 4.6 from 4.6 last.
https://www.cmegroup.com/daily_bulletin/current/Section51_STIR_Call_Options.pdf
https://www.cmegroup.com/daily_bulletin/current/Section52_STIR_Put_Options.pdf
