Kinky Curve
January 22, 2021
–A few new highs yesterday: Ten year treasury to inflation-indexed note breakeven to 218.5. There are a lot of data points that can’t quite seem to surpass highs from the middle of 2018, but this spread has equaled the highs of that year (10 yr inflation proxy). 5/30 treasury sprd new high at 143 bps. Interestingly, 5/30 was at a new LOW in mid-2018 at just 21 bps. Today’s level is the highest since Trump’s election in 2016 when it reached 140.
–Green/blue euro$ pack spread (3rd year forward to 4th year forward) has been an outperformer, settling at 38.25. This is the highest since 2015 (chart attached). Strength here is due to several factors: 1) general steepening 2) Fed guidance of no hikes for three years 3) the libor extension announcement until June 2023. EDM3/EDU3 spread on its own is 16.5; it had been 5 in late November just prior to the announcement. From BBG, “ICE Benchmark Admin’s latest consultation concludes Jan 25, and some strategists have speculated an announcement on when the spread [SOFR/libor] will be fixed – and thus apply to the new secured overnight financing rate benchmark – may come as soon as next week. This spread will be the pricing gauge for euro$ futures after June 2023.” Such an announcement could cause further steepening of grn/blue.
–The red/green (2nd to 3rd year) spread is just 23 bps, while blue/gold (4th to 5th) is 34, so green/blue is obviously where the meat is. Consider that the 2/10 treasury spread closed 98.4, and red/gold euro$ pack spread at 95.25, essentially equal. So this one-year kink in the curve is worth about 40% of the steepness in 2/10…
–In a more general comment about the curve and inflation dynamic, here’s a tweet from Michael Ashton, @inflationguy : “I know that money doesn’t matter (tongue in cheek), but last week M2 rose almost $400mm, to bring the 52-week rise to 27.1%. Now, volatility around year-end is normal but…no sign the Fed is slowing.”
–There’s a lot of coverage concerning bitcoin’s 20% + fall from grace over the past 5 sessions (more like 33% from absolute high to this morning’s low). Bitcoin has been a poster child for rampant speculation, even though the recent entrance of new institutional players has now provided the cover of legitimacy. Nasdaq’s seeing a bit of profit taking this morning after new highs, could some of the speculative froth be skimmed away here as well?
