Washout
May 26, 2023
–Washout in rates continues. SFRZ3 settled -15 at 9508. Range on the month in that contract has been 108.5 bps and high settle to yesterday’s low settle is 89.5 bps. New highs in near SOFR calendars as another near-term hike is priced: FFQ3 settled 9467 or 5.33%, exactly 25 bps above the current EFFR of 5.08% (there are 2 FOMC meetings in front of the August contract). SFRM3/M4 made a new recent high of -126.25, while SFRH4/H5 made a new recent low of -121.5. I.e. weakness is concentrated in the 3rd, 4th and 5th forward quarterly contracts, H4 (-19.5, 9551), M4 (-21.5, 9594.5), U4 (-20.0, 9630.5). Inverted spreads indicate that eases are still expected, but this price action suggests they are coming a bit later and perhaps less aggressively. On the other hand, when something bad happens, the Fed USUALLY eases rapidly. Of course, we’re in a bizarro world with a bizzaro Fed: Hike Fast and Cut Slow?
–2/10 spread new low -69 bps (2y +16 at 4.506 and 10y +9.8 at 3.815). The thirty year bond yield ended at 4%, the top of this year’s 3.5 to 4% range. High in 2022 was 4.4%.
–Today we get the Fed’s preferred inflation measure, PCE prices, expected 4.3% yoy vs 4.2% last, with Core 4.6 from 4.6.
–SOFR option pit closes at noon Chicago today. Box until 4.
