Rates locked
September 25, 2020
–Once again activity in rates is moribund. Tens closed at a yield of 66.4; the range has been between 64.5 and 69.5 for the past ten sessions. October treasury options expire today.
–After perhaps reading too much into the EDZ0/EDH1 sale Wednesday at -6.5, to my consternation someone paid -6 and -5.5 for about 40k yesterday, causing a new recent high settle in the spread of -5.0. (total volume dec/march was 48k). EDZ0/EDZ1 one-yr calendar spread also closed at a new recent high of -3.5 (9973.5/9977.0). That is the lowest one-year spread on the curve, each one thereafter gently moves more positive, with EDZ1/EDZ2 same magnitude as the front, but with a positive sign (9977/9973.5). Powell said a couple of times this week that negative rates are not appropriate for the US and would harm money markets, a sentiment the euro$ strip grudgingly accepts, although there are still buyers of EDH1 100 calls. Fed fund contracts have barely reacted to repeated dismissal of negative rates. The Nov’22 contract is the peak on the strip settling at 100.00, or exactly zero. The lowest contract on that curve is the expiring front Sept contract, FFU’20 at 9991.25. The Fed effective (EFFR) has been 9 bps every day in Sept. Open interest in EDZ0 was up 42k according to prelim figures. In spite of weakness in banking stocks, the thought appears to be that EDZ can roll up to the current October (EDV0) level of 9977.5. By the way, the gap between the valuation of US banking sector and SPX is said to be at a recent record wide.
–New Home Sales yesterday were over 1 million, a level not seen since 2006. If one only considered this data they’d be hard pressed to justify record low rates for many years to come.
–Today’s news includes Durable Goods, Capital Goods Orders.
