FOMC minutes today
July 7, 2021
–FOMC minutes today will perhaps give a better sense of taper timing as yields continued to fall yesterday. Tens down over 6 bps to just 1.368%. 2/10 treasury spread made a new low of 115, down 4.6 on the day. Red/gold (2nd to 5th year euro$ spread) now equals 2/10, settling at 114.75, down over 6 on the day. This spread began June just over 162 bps. The gold pack (5th year) soared 9.5 bps with a price just over 98.33, a yield just below 1.67%. What is notable is that the red/green pack spread (EDU2, Z2, H3, M3 vs EDU3, Z3, H4, M4) is 57.625. So that one-year spread is almost exactly half of the three-year red/gold spread. The elevated premium is partially due to the libor transition date at the end of 2023, but it also reflects a rough idea that 2 hikes could occur at the end of next year going into 2023, and then tail off from there. Perhaps the idea is that a split midterm election will close the fiscal purse at the same time that the Fed is becoming less generous. Another notable feature of yesterday is that the ten year inflation-indexed note is nearing negative 1% again, closing at -97.6, down 5.6 bps on the day. The Fed claims to have some concerns about frothy real estate prices, but rock bottom mortgage rates along with deeply negative real rates suggests continued flows into real assets like homes and gold.
–EDZ2/EDZ4 spread traded 118 just after the FOMC meeting. Settled yesterday at 97. There was a buyer of ~15k 3EU 9887.5c yesterday, which settled 4.75 vs underlying EDU’24 9864.5. If we get near that strike, then Z2/Z4 will likely be 80 to 85. Worth noting is that a significant amount of activity yesterday was short covering in that open interest was down across the board. Open Interest in ED, -62k, in TU -21k, in FV -42k, TY +3k, UXY +0.8k and US -1.6k.
