Yields powering higher
October 22, 2024
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–Yields are climbing. Yesterday 10’s rose 10.9 bps to 4.182%. I had mentioned the midway point of this year’s range in the 30y bond, from the April high of 4.81% to the Sept low of 3.93%. That level is 4.37% and the market had bounced around that area for a few days. However, late yesterday we popped above the 0.618 retrace of 4.475%. With a futures settle of 118-22 on USZ4, I marked 30s at 4.487%, and as of this note the futures print 118-10.
–Flows were biased to the downside. For example, a buyer of 50k TYX4 111.75p for 26 ref 111-17. Settled 27 vs 111-165, with open interest up 44k. Nov options expire Friday. Somewhat interesting that these could be done at one price, as the delta was around 60, equivalent to 30k TYZ4. Also a new buyer of 35k 2QZ5 9625/9600p spd for 5.0 to 5.25, settled 5 vs SFRZ5 9654.5. (This is around 5y treasury part of the curve).
–Dollar was strong. Maybe not much of a surprise as easing expectations are whittled away in the US. There was selling in FFX4 at 9534 (settled there). A cut of 25 should result in a final settle of 9536.2. SFRZ4 closed down 4 at 9559.5 and SFRH5 down 7 at 9598. The peak contract on the SOFR curve is SFRM6 at 9658.5. One month ago on Sept 24, the peak contract was the first red at 9714. So about 50 bps have oozed out of reds. Again with respect to DXY, while SFRH5 was down 7, there was a buyer of 50k ERF5 9787.5/9812.5/9837.5 c fly for 2.75 (euribor) against ERH5 9766.0s. Central banks stepping on different pedals.
–Kashkari keeps wondering if the neutral rate is higher than he thought. Logan leaned a bit hawkish and indicated there could be more volatility in funding rates. Here’s a short snippet from her speech yesterday:
At present, liquidity appears to be more than ample. Reserve balances are around $3.2 trillion, compared with around $1.7 trillion in early 2020. The economy and financial system have grown, and the dash for cash at the start of the pandemic as well as the banking stresses in March 2023 may have led banks to increase their demand for liquidity. Still, I think it’s unlikely banks’ liquidity demand has nearly doubled in half a decade.
The Fed is working toward a regime of “ample” liquidity as opposed to excess liquidity. Obviously there could be an undershoot of ample. I thought the comment that she finds it unlikely that banks’ liquidity demands could double in five years a bit odd. Go buy an Egg McMuffin. Or, look at SPX. Five years ago, it was 3000, now just shy of 6000. A lot of doubles in the past five years…
