Bullard and SFRM3 on the same page
February 23, 2023
–News today includes Q4 GDP revision, still expected 2.9%. Jobless Claims expected to poke back over 200k. 7y auction. The Fed’s preferred measure of inflation, PCE Core Prices, is out tomorrow, expected 4.3% yoy from 4.4% last. Headline number expected 5.0, same as last.
–Vol eased yesterday as rate futures stabilized. However, this morning TYH is pegged at the 111-00 strike, essentially at the low of the move. On Feb 2, TYH3 settled 115-17+. In the 13 sessions since then, nine have been lower closes. Nothing really new in the minutes; we already knew that a couple of members favored 50. The messaging since the last meeting has generally been consistent, focusing on a need for continued restraint. This excerpt on financial stability is somewhat interesting:
In their discussion of issues related to financial stability, several participants discussed vulnerabilities in the financial system associated with higher interest rates, including the elevated valuations for some categories of assets, particularly in the CRE sector; the susceptibility of some nonbank financial institutions to runs; and the effect of large, unrealized losses on some banks’ securities portfolios.
It’s not a loss until you sell, right?
–FFJ3 settled at a new recent low 9511.5 (9517 should be approx settle if Fed only does 25 at the March 22 FOMC). Lowest contract on the FF curve is August at 9462 or 5.38%; Bullard was on CNBC yesterday and said he favored 5 3/8% target, so the market is in sync. June SOFR regained the lowest slot on the curve at 9464, with Sept at 9464.5. CLJ3 closed near the low of the year at 73.95 as API data showed a 9.9 million barrel inventory increase, more than expected. Somewhat of a red flag for the “no landing” proponents.
Bear market
February 22, 2023
–Big jump in yields Tuesday. From Friday’s close, ten-yr up 12.7 bps to 3.951%. Fives led the way (in front of today’s auction) with a surge of 13.8 bps to 4.171%. On the SOFR strip reds thru golds were -13.5 to -16.5.
–Ten year treasury to tip breakeven notched a new recent high at 248 bps. Worth noting: 5, 10 and 30 year tips are between 1.52 and 1.59%, a respectable level for real yields and in the upper half of recent ranges. (Powell often mentions the need for positive real yields across the curve).
–In the front end, near spreads made new highs. Notably, SFRM3/U3 finally settled positive for the first time since April, at 0.5 (9465.5/9465.0). On Feb 1, the June/Sept calendar was -19, since then it’s been straight up as the market accepts a stingy Fed that’s higher for longer. Having said that, SFRU3/Z3 is still -21.5 (9465.0/9486.5). As an aside, at the end of January paper was selling huge amounts of SFRZ 9550 and 9562.5^ at 80 to 84 bps with futures around strikes. Yesterday SFRZ3 settled 9486.5, 76 lower than the 9562.5 strike. The 9550^ settled yesterday at 96.25, while the 9562.5^ settled 103.0.
–Calendar rolls are now active in treasuries, which might have an influence on the following: Open interest in aggregate was up in every treasury contract… by a lot: TU +96k, FV +116k (approx 2.6% increase), TY +55k, UXY +55k, US +36k and WN +23k. Increases in open interest are a sign of trend strength, as is an increase in implied volatility as the market moves in tandem with trend. Yesterday TYJ vol up to 7.8 (2’02), near recent highs and USJ 13.9 (4’02), a new recent high. There was a new buyer of 50k TYM3 108/107 put spread, mostly at 10. Settled 11 ref TYM3 111-18. Top strike is approx half a percent away in yield which doesn’t even seem that far in this environment (consider move cited above in SFRZ3, 75 bps in 3 weeks).
–Five year auction today followed by the Fed minutes. In the wake of the last Fed meeting, which was followed in 2 days by the massive payroll number, Fed officials have uniformly tilted toward further restraint. Minutes likely helped shape the message.
ESH finally trades below the Feb 1 FOMC low
February 21, 2023
–On Feb 1 ESH3 low 4048.5. That was the day of the FOMC meeting. This morning is the first time in Feb that ES has traded below that level, with a low this morning 4047.75. In comparison, TYH low on Feb 1 was 114-175. After a brief rally the next day, the huge 517k payroll report on Feb 3 saw TYH3 with a low of 114-135….and it has only gone down from there, now around 111-19.
–On Friday the front end was weakest on the strip, with the first four quarterlies settling lower on the day. For example, SFRZ3 settled 9498, down 4 on the day, and every contract behind was higher, with greens (3rd year forward) being the leader, closing +4. Everything is lower this morning, with SFRZ3 9493.5 (lowest print of the cycle 9490 on Friday).
–Today’s news includes Existing Home Sales expected 4.1m. At the beginning of 2022, just one year ago, this number was 6.5 million. Chart attached. Two year auction as well; 2s ended Friday at 4.62% (wi is 4.64 this morning). One year ago the 2y yield was just above 1.5%.
Nearly priced for peak terminal
February 19, 2023 – Weekly comment
From February 2 on, the Fed Effective rate has been 4.58 except for one print at 4.57. If the Fed hikes 25 in March the new EFFR should be 4.83, if 50 then 5.08. April FF, which prices for the March 22 FOMC, made a new low this week, printing 9512.0 or 4.88. I think of that as a 20% chance of a 50 bp hike in March vs 25. FFJ3 settled Friday at 9513.5, but the contract low has been 9485 or 5.15 on November 4. The lowest contract on the FF strip is August’23 at 9470.5.
We’ve had several hawkish data prints recently, starting with the big NFP, then CPI, then this week’s Retail Sales and PPI. Recent Fed speakers have all tilted toward continued restraint, including Mester, Bullard, Bowman and Logan.
Markets have adjusted accordingly, with new lows in front SOFR contracts: SFRM3 settled at a new contract low 9472.0 and SFRU3 at a new low of 9474.0, both around 5.25%, versus the current FF target of 4.50-4.75%. I marked 2/10 as low as -86, though it printed -92, and ended the week at -79.7. These are the lowest levels since the early 1980s. The red/gold euro$ pack spread ended Friday at -75.625, just above the all-time low of -91 made in December. Both the 6m and 12m bills yield just over 5%. I saw a clip that said SP500 earnings yield is approx. 5.08%, the lowest spread to 6m bills since 2001. Below is a chart of SP Div yield and one-year t-bills.
Obviously the above notes don’t mean that front end yields won’t go higher, however, it’s also clear that there have been some large market adjustments. In addition, short term yields have become strong competition to stocks, especially in an uncertain environment.
Here’s an excerpt from the NY Fed’s HH debt and Credit Report, Q4, emphasis added.
Total household debt rose by $394 billion, or 2.4 percent, to $16.90 trillion in the fourth quarter of 2022… Credit card balances increased by $61 billion to reach $986 billion, surpassing the pre-pandemic high of $927 billion; mortgage balances rose to $11.92 trillion, auto loan balances to $1.55 trillion, and student loan balances to $1.60 trillion. The share of current debt transitioning into delinquency increased for nearly all debt types .
It’s hard to tell when increased delinquencies become a problem. In part, new deals at higher rates probably help to cushion the blow of missed payments. The problem is that the realization that delinquencies are hitting critical mass can happen all at once.
In that connection, the return of 50-cent to VIX options is notable. Last week there was a buyer of 100k May VIX 50 calls for 0.50. Open interest in the strike is now 218k, ended Friday at 0.57. In nearer maturities, the 40 calls have large amounts of open interest: 220k in March 40c which ended at 0.31, 104k in April 40c which ended 0.61 and 286k in June 40c, ended 1.05. Spot VIX is 20.20, March 21.25, April 21.95, May 22.25 and June 22.55. An old BBG article estimated that after a year of patiently paying around 50 cents for VIX calls, the bet paid off in February 2018 with a $400 million surge. In 2017 VIX ranged from 9 to 15, in early Feb’18 it surged to 37.
Cem Karsan (@jam_croissant) opines that Carl Icahn has become active in buying ESH puts, paying about 31 for 23.5k ESH3 3950 puts on Tuesday, and another 12k ES Feb 21 expiry 4050p on Thursday. ESH3 3950p settled 37.0 on Friday vs 4087.50.
My thesis is that a hard and unexpected break in stocks will likely cause participants to trim back expectations for near term hikes. We don’t know when/if that will occur, but there seem to be some patient option buyers related to equities, just in case.
OTHER THOUGHTS/ TRADES
Clear exit trades occurred in rate options last week; unwinding of profitable bets for higher rates. For example, there were two block sales in 0QM3 9550p during the week, 46k at 24.5 vs 9573.0 in SFRM4 and another 46k at 21.0 vs 9579. Original buys started right on the Feb 1 FOMC, paying 5.0 ref 9661.0. On Feb 7, open interest in that strike peaked at 262k. On Friday OI has half that amount at 132k. It appears as if selling pressure is being used as an opportunity to exit bearish bets.
| 2/10/2023 | 2/17/2023 | chg | ||
| UST 2Y | 451.1 | 462.1 | 11.0 | wi 459.5 |
| UST 5Y | 392.6 | 403.3 | 10.7 | ‘wi 400.5 |
| UST 10Y | 374.5 | 382.4 | 7.9 | |
| UST 30Y | 382.7 | 388.2 | 5.5 | |
| GERM 2Y | 276.0 | 287.7 | 11.7 | |
| GERM 10Y | 236.4 | 244.0 | 7.6 | |
| JPN 30Y | 158.4 | 148.3 | -10.1 | |
| CHINA 10Y | 289.2 | 289.0 | -0.2 | |
| SOFR H3/H4 | -52.5 | -39.0 | 13.5 | |
| SOFR H4/H5 | -114.0 | -112.0 | 2.0 | |
| SOFR H5/H6 | -16.0 | -22.5 | -6.5 | |
| EUR | 106.79 | 106.96 | 0.17 | |
| CRUDE (CLJ3) | 79.92 | 76.55 | -3.37 | |
| SPX | 4090.46 | 4079.09 | -11.37 | -0.3% |
| VIX | 20.53 | 20.02 | -0.51 | |
Bullard strikes again
February 17, 2023
–PPI was hotter than expected +0.7%, but Housing Starts were weak and Philly Fed at -24.3 was the lowest reading outside of the covid spike and GFC. The market absorbed this data, and easily digested early comments by Mester that 50 bp hikes are still on the table. However, late comments by Bullard, who is also yammering about the need for 50 bp hikes sent stocks into a tailspin in front of today’s large monthly option expiration. ESH was around 4135 when Bullard’s balloon was floated on the tapes, settled 4099.75 and as of this note is 4067. Stocks are closed for Monday’s Presidents Day holiday, (gee, do we still have that?) so adjustments related to puts vaulting into the money will need to be made today, and …it’s going to be sloppy.
–As yesterday, profit-taking on the front end continued, for example another 46k 0QM 9550p were sold (exited), yesterday at 21 covered 9579; on Wednesday it was the same size with a price of 24.5 covered 9573. This dynamic is also evident in 2/10 which rose another 4.4 bps to -77, having printed as low as -92 Wednesday morning. 2y yield -0.8 at 4.614% and 10y +3.6 bps to 3.843%. On the SOFR curve M3 was +1.5 to 9478, M4 was the strongest contract, settling +6.0 at 9585, M5 was -0.5 at 9658.5 and M6 -3.0 at 9675.0.
–Lukashenko says Belarus says ready to join war if his country is attacked by even one Ukrainian soldier. The Pentagon has a high-level official, Michael Chase, expecting to visit Taiwan in the next days. Geopolitical spark over the long weekend?
Using strong data as a chance to take profit
February 16, 2023
–Strong Retail Sales data (+3.0%) sparked selling pressure on rate futures, but the front four qrtrly SOFR contracts came back to close positive on profit taking. The lowest contracts on the SOFR strip, June and Sept’23 closed up 4 on the day (9476.5 and 9478.0). By contrast June and Sept’24 were down 5.5 and 6.5 (9579.0 and 9614.0). The one-year calendars made new highs, with M3/M4 at -102.5 and U3/U4 -136.0. The ‘pivot’ to Fed easing is being less aggressively priced, but it’s worth noting that the only positive 3-month SOFR calendar is March’23/June’23 at +29.5. Every contract past June is subsequently higher in price until Dec’26/March’27 which settled +0.5 (9683.5/9683.0).
–There was obvious profit taking on shorts, for example a block sale of 46k 0QM 9550p at 24.5 covered 9573.0. The original buy of this put was on Feb 1, FOMC day, paying 5.0 ref 9661.0. That’s an astonishing 88 bp swing in futures in just ten trading sessions. Prior to the block, that put was quoted in the pit and the market was 25.5/26.0 covered 73; gave 1bp on the block to get the size done. Longer curve trades also saw a profit taking bounce from the lows, for example 2/10 printed a 40+ year low at -92 but came back to end at -81.5. I marked the 2y around unch’d at 4.622% and tens +4.6 at 3.807%.
–Today’s news includes PPI expected +0.4% m/m vs -0.5 last, with yoy expected 5.4% from 6.2 last. Philly Fed as well, which was 4.9 last.
–There were a few large VIX call spreads bought yesterday, but BBG focused on “the return of 50-cent” reporting a buy of 100,000 May 50 calls for 0.50. Spot VIX closed at the bottom of the recent range at 18.46.
Inflation decelerating? Not so fast
February 15, 2023
–CPI yoy was 6.4%, down 0.1 but higher than expected 6.2. However, the NY Fed’s Underlying Inflation Gauge, also out yesterday, was 5.1% for both the ‘full data set’ and ‘prices-only’ and both were down 0.3% from the previous month. In any case, the confidence for rapidly declining inflation was shaken and short term rates again jumped. Weakest contract on the SOFR strip was June’24, settling down 20.5 at 9584.5. On Feb 1, just ten trading days ago, it settled 9665.0, a drop of 80.5 bps! Not surprisingly, near calendar spreads are making new highs. For example, M3/M4 settle -112 (9472.5/9584.5); low settle this month was -155 on Feb 2. SFRM3/Z3 settled -24, having been below -50 a few weeks ago. The pivot is moving back. Retail Sales today expected +1.8% with Industrial Production -0.7.
–Longer end of curve flattened to new lows with 2 and 5 year notes bearing the brunt of selling. 2/10 was -86 with 2s up 8.8 bps to 4.62% and 10s up 4.4 bps to 3.761%. 5/30 also at a new low of -20.
–FFJ3 settled 9515.5 or 4.845%, a hike of 25 at the March FOMC should make EFFR 4.83. FFN3 settled 9477.5 a spread of 38 to April. There are 2 FOMC meetings in between, May 3 and June 14. There is also meeting July 26, worth about 16% of the July contract.
–A couple of relatively hawkish comments in a speech from Lorie Logan, now head of the Dallas Fed:
“In moving forward with monetary policy, we need to manage two risks.
The most important risk I see is that if we tighten too little, the economy will remain overheated and we will fail to keep inflation in check. That could trigger a self-fulfilling spiral of unanchored inflation expectations that would be very costly to stop.
A key lesson I took away was that when central banks aren’t sufficiently proactive in addressing high inflation, the road back to price stability is longer, the labor market is weaker, and the scars on the economy can last long after inflation is finally reduced. We must stay focused on bringing inflation back to target in a sustainable and timely way.”
–Large buyer of 23k ESH 3950 puts yesterday for about 31 points Settled 28 vs 4145.50. Cem Karsan on twitter pointed to Carl Icahn. Another twitter tidbit from a week or so ago pegged today, Feb 15, as a likely crash date using chatgpt.
https://www.newyorkfed.org/research/policy/underlying-inflation-gauge
https://www.dallasfed.org/news/speeches/logan/2023/lkl230214
I’m going off the rails…
February 14, 2023
–Big data today is CPI, expected 0.5 mom and 6.2 yoy vs 6.5 last. Core expected 0.4 mom and 5.5 yoy vs 5.7 last. Also worth noting that NFIB small business optimism is released and last was 89.8. That value approaches the low since 2013 which was in June 2022 at 89.5 (covid low was 90.9 and GFC low 81.6). Retail Sales tomorrow expected +1.8 mom; a ZH article citing BofA suggests that credit card usage could translate into a blowout number. The Social Sec COLA increase was 8.7%, which kicked in with the turn of the calendar, which may also have helped boost spending. It’s not MY credit card, it’s the GOVERNMENT’S credit card.
–Selling pressure continues in the front end with SFRM3 -2.5 at 9479.5, a new low (lowest contract on the strip). Buyer of 50k SFRZ3 9450/9400ps for 9 to 9.25 (Z3 settled 9512.5). Vol firmed in front of CPI, esp for nearer maturity high gamma. For example, FVH3 107.75 straddle was 59/60 at the open, but a buyer of 20k FVH 107p for 11 covered 107-27 to 27+ helped juice the straddle to 62/63 by the close at essentitally the same futures price.
–US inexplicably announced further sales from the SPR while simultaneously naming Lael Brainard as Biden’s top econ advisor (Director of the NEC). Don’t do it Lael! You will be the scapegoat for soaring oil prices as Chinese demand accelerates.
–Train derailment in Ohio from Feb 3 is increasingly being referred to as an environmental disaster. As poet-philosopher Ozzy says, “The media sells it and you live the role.”
https://www.npr.org/2023/02/14/1156567743/health-east-palestine-ohio-train-derailment-chemicals
CPI Tuesday
February 13, 2023
–Bear steepener Friday with the 2y up just half a bp and 30s up 7.5 (4.511 and 3.827). 2/10 ended at -76.6, having posted a new cycle low (marked at futures settlement time) of -82.4 on Thursday.
–Near SOFR calendars made new highs, with significant pressure continuing on the front end. SFRU3 settled -3 at 9487 a new low. SFR March/June 3-month calendar settled at exactly ¼ percent (9507/9482) while Sept/Dec 2m calendar settled at a new high of negative 27 (9487/9514). SFRH3 and SFRZ3 are near the same prices at 9507 and 9514, so this pricing suggests a hike, then ease. The lowest 1-yr calendar on the strip is Sept’3/Sept’4 at -155.5 (9487/9642.5). The lowest settle on this, or any other 1-yr calendar for the cycle, has been -177.
–A lot riding on tomorrow’s CPI, expected 6.3 yoy from 6.5 last, with Core expected 5.5. Interesting link says Walmart is pushing suppliers to stop price hikes:
“Because the consumer is now under more pressure, and Walmart is under pressure, that sets up a dynamic where there’s probably not a lot of pricing going forward.”
Notes on rates
February 12, 2023 – Weekly comment
On the week the US 2y yield was up 21 bps, just over 4.5% (4.511). The 5y was up over 26 bps to 3.926%, and the 10y was up 22 to 3.745%. The German 2y was also up over 20 bps to 2.76%.
On the SOFR strip, H4 and M4 were the weakest, both down 36 bps on the week! SFRH4 settled 9559.5 or 4.405% and SFRM4 at 9607.0 or 3.83%. At the December 2022 FOMC, the Fed’s year-end FF projection for 2023 was 5.1%. SFRZ3 settled at a new contract low 9514.0, down 30.5 on the week. This contract has never traded below 9500 or 5%. FFF4 settle was 9509 or 4.91%. The contracts that price for year-end 2023 are not quite at the Fed’s projection, but they are getting closer.
The SOFR contracts that ARE below 9500 (above 5% yield) are June’23, the lowest contract on the strip at 9482.0, and Sept’23 at 9487.0. These contracts are consistent with the Fed’s projections.
The Fed’s CPI projections at the Dec’22 FOMC were 3.1% by year-end 2023 and 2.5% for 2024. (Core 3.5 and 2.5). CPI is released Tuesday and is expected 6.2% yoy from 6.5% last, with Core 5.5% from 5.7% last. For year-end 2024, the Fed projects 100 bps of ease, with FF’s penciled in at 4.1%. SFRZ4 settled 9662.0 or 3.38%, and FFF5 at 9656.5 or 3.435%, so the market currently perceives more easing will occur than the Fed thinks. (Note there is really no open interest in FF contracts past June’24).
Summarizing weekly changes on SOFR contracts:
SFRH3 down 5 bps to 9507.0
SFRH4 down 36 bps to 9559.5
SFRH5 down 29 bps to 9673.5
SFRH6 down 21.5 to 9689.5 (this is the highest priced/lowest yield on SOFR strip)
In many ways Powell has to be pleased with the reaction to his guidance this week. Forward rates are moving toward the ‘higher for longer’ Fed view, and the pivot has been pushed back further in time. SFRM3/Z3 calendar was -54.5 three weeks ago, but settled at a new high -32.0 (9482/9514) Friday as rate cut expectations are slowly being pushed back. FFQ3 to FFF4 spread settled -27.0 (9482/9509) from -38 the previous week. That spread captures FOMC meetings in September, November and December. SPX was only down 1.1% on the week. The dollar strengthened. March WTI crude is nearing $80/bbl, up over $6 on the week.
A few large trades grabbed attention this week: Huge buying of SFRU3 9450/9400 put spreads, for 5.5 to 6.0 ref 9496/95; 150k. SFRU3 9462.5/9412.5ps 8.5 paid 50k. These put spreads settled 8.0 and 10.75 vs 9487.0. On Friday, there were new buys of 25k TY Week-3 Feb (2/17) 111p for 4 (settled 5 ref 122-22) and 13k 111.25p for 5 (settled 7). Currently the 111 put is about ¼% out of the money, approx. 4% on the current 10y assuming a parallel curve shift. At this time, the FF target range is 4.5-4.75%. If the Fed were to hike 25 bps at each of the next four meetings through July, the FF target would be 5.5-5.75%, right at the upper strike of the 9450/9400ps. It was less than one year ago on March 16 2022 when the Fed first raised from 0 to 0.25-0.50%. A 25 bp hike at next month’s meeting, which is fully priced, will put the FF target at 4.75-5.0%. That’s a lot of tightening that still needs to work thru the system.
There is huge open interest in the first four quarterly SOFR put options. March, 1.888m, June 2.388m, Sept 3.038m and Dec 0.808m. Over 8 million puts vs 4.89m open in the first four quarterly futures. Those put totals exclude 2.2m in April options and 1.05m in May (both with SFRM4 as underlying).
I am just summarizing some structural aspects of the market because it still appears as if the range of economic outcomes is quite broad. Geopolitical issues are fluid. There’s a lot of focus on China’s re-opening, though China’s ten-year yield is stagnant around 2.9%. The cap on Japanese Gov’t bonds is likely to be further relaxed with the installation of the new BOJ head, Ueda. Japan’s core consumer prices were up 4% yoy in December, vs a cap of 50 bps on JGBs. Japan is also reportedly reversing its stance on nuclear power.
On a more anecdotal level, it seems as if tech job cut announcements are large and accelerating, at odds with the huge payroll number last week. I went to the main RJO downtown office for the first time since COVID, and mid-morning pedestrian activity is depressingly sparse. A guy in the office said five Starbucks in walking distance had closed. On the other hand, an early evening trip for drinks found the bar completely packed. Then again, I took an UBER from the Viagra triangle to Wilmette at about 8:30 and the cost was only $34.95, whereas a cab would have been over $40 pre-covid. A friend said his daughter is looking at houses in the far western suburbs of Chicago and every home between $250 and $350k has a bid on it in the first day.
2/10 last week trade below -82. The treasury market is clearly signaling an economic slowdown, while the front end accepts the idea that crushing inflation is still the Fed’s number one job and is pricing further hikes accordingly.
Fairly big news week: CPI Tuesday. Retail Sales and Industrial production Wednesday, along with a 20y auction (w/I 3.96/3.955 vs 3.678 last month). PPI, Housing Starts and Philly Fed Thursday.
| 2/3/2023 | 2/10/2023 | chg | ||
| UST 2Y | 429.9 | 451.1 | 21.2 | |
| UST 5Y | 366.2 | 392.6 | 26.4 | |
| UST 10Y | 352.5 | 374.5 | 22.0 | |
| UST 30Y | 362.7 | 382.7 | 20.0 | |
| GERM 2Y | 254.7 | 276.0 | 21.3 | |
| GERM 10Y | 219.2 | 236.4 | 17.2 | |
| JPN 30Y | 151.2 | 158.4 | 7.2 | |
| CHINA 10Y | 289.5 | 289.2 | -0.3 | |
| SOFR H3/H4 | -83.5 | -52.5 | 31.0 | |
| SOFR H4/H5 | -107.0 | -114.0 | -7.0 | |
| SOFR H5/H6 | -8.5 | -16.0 | -7.5 | |
| EUR | 107.99 | 106.79 | -1.20 | |
| CRUDE (CLH3) | 73.39 | 79.72 | 6.33 | |
| SPX | 4136.48 | 4090.46 | -46.02 | -1.1% |
| VIX | 18.33 | 20.53 | 2.20 | |
In: Eurodollar Options
