Steepness shifts to front end in wake of FOMC
June 17, 2021
–The five year note was crushed as the Fed indicated a couple of rate hikes by the end of 2023. Five-year (at futures settlement) was up 9.2 bps to 0.876%, while tens rose 6.1 bps to 1.558% and thirties actually fell a fraction of a bp. 5/30 spread easily made a new recent low, plunging 9.4 to 132 bps. Steepness shifted to the front end of the curve as all near euro$ one-year calendars made new recent highs. As an example, EDZ’21/EDZ’22 rose 4 to 24.5, while EDZ’22/EDZ’23 jumped 7 to 61.5. While Fed dots indicate 2 hikes, the market is looking for more. On the eurodollar curve, the blue pack (4th year) was the weakest, closing down 15 on the day at an average price just below 98.35, or a yield of 1.65%. Prior to the announcement there was a buyer of 3EN 9850 puts for 3.5 bps, these closed at 9.75 as the underlying EDU’24 settled at the money at 9851 (-15) and traded as low as 9846.5. Powell said that even though growth in 2022 was forecast to be very strong at 3 to 3.5%, the Fed would remain highly accommodative and intimated the central bank would lag the curve. While IOER was raised 5 bps. near ED contracts only fell 1.5 on the day.
–Post-Fed there were a couple of 20k block trades which appear new from this morning’s open interest report. EDU’22/EDU’24 bought for 121 bps and EDZ’22/EDZ’24 bought for 118.5. Both of these two-year calendars settled 117. Five or more 1/4 percent hikes over two years? Seems reasonable. I suppose that in a broader context, trades like these signal a change in sentiment from large asset managers: the Fed has shifted its stance. The dollar jumped and precious metals have been shellacked. Stocks are showing early weakness this morning, which could accelerate due to Friday’s option expiration.
–Powell will be testifying before Congress on Tuesday to further massage his message and quell undue volatility.
