What I CAN observe is my bond position disintegrating
October 18, 2023
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–Rate futures imploded to new lows on stronger than expected Retail Sales +0.7 m/m vs +0.3 expected with the previous month revised up 0.2 to +0.8%. As a result, Atlanta Fed GDP Now was jacked up to 5.4% from 5.1%. Even Barkin said that his contacts don’t paint the same strong picture of economic activity…if the Fed guys don’t trust the data then we have problems. Of course, Barkin was a lot more nuanced in his comments, mostly saying that the wealthy have seen higher equity & housing prices, and aren’t negatively impacted by variable cost debt (perhaps just the opposite) and are spending apace. Maybe that means the Fed has to target lower stocks?
–New highs in all near 1-yr calendars with SFRH4/SFRH5, the most inverted 1y calendar on the strip now at -86 (9457.5/9543.5), indicating a chance of only about 3.5 Fed cuts over that year. SFRZ4 was the most heavily traded contract with 560k in volume. Like almost all SFR contracts, it settled at a new contract low 9521.0, down 14 on the day. On May 11, as the Fed was still trying to contain fallout from regional banking failures, SFRZ4 settled 9723.5, over 200 bps higher than it is now. (And the current price still implies a few cuts next year).
–WSJ’s Nick Timiraos tweets that Barkin was once asked a question about the Neutral Rate. “Before answering, he offers this preamble about the neutral rate: ‘An animal in the wild that everyone talks about but no one has ever seen.'” A perfect lead-in for today’s WSJ headline: Wall Street’s Latest Obsession is an Unknowable Number. ‘The debate centers on the unobservable “term premium” that models say is surging.’
No sh-t. The models say that, eh? When they come out with sharpened pencils spreadsheets to quantify all the pricing components of a given ‘security’, you can be pretty sure that actual prices are getting away. Just how do you price fear? I guess high implieds give a little indication. But what really needs to be priced is potentially massive open-ended losses. And it feels like that variable is eating at the perimeter of not only markets, but the total geopolitical structure.
–Today’s news includes Housing Starts and the Fed’s Beige Book. 20yr auction today; the yield was 5.15% at yesterday’s future settlement time. Biden continues to request huge sums for Ukraine, and whatever one thinks of his policies, bond holders don’t like it.
Wall Street’s Latest Obsession Is an Unknowable Number
The debate centers on the unobservable “term premium” that models say is surging.
