Clues
March 29, 2022
–5/30 treasury spread briefly inverted yesterday and closed just above zero, with 5s 2.56% and 30s 2.569. It’s worth mention that the lowest contract on the SOFR curve is EDM’23 at 9703.5 and lowest Fed Fund contract is FFU’23 at 9698.5. These forward financing yields at 2.965 and 3.015 are 40+ bps above the longer dated paper on the treasury curve (which is financed by SOFR). With the continued sell-off in the front end, near ED calendar spreads settled at new highs, with EDM2/U2 at 69, +1.5 and EDM2/EDM3 159.5, up 5 on the day. While there’s a bit of hand-wringing in the financial press about the recessionary signal associated with treasury inversion, the eurodollar curve is quietly imploding, with red/gold pack spread (2nd year to 5th year) settling below negative 57, a new historic low. The lowest the 2/10 treasury spread has traded since the early 1990’s is -56; 2/10 is currently +13, a new low for this cycle. (Net ED changes, whites -4.875, reds -6.375, greens -1.125, blues +4.375 and golds +5.125). It’s like a seesaw with the big fat Fed sitting on one end while the helpless skinny (bond) kid is up in the air flailing on the other side. In the meantime stocks frolic on the jungle gym and oil has taken the slide (CLK2 down nearly $8/bbl to 105.96s).
–Also sliding yesterday was the yen, as the BOJ stepped in to cap JGB yields; it worked for Australia, right? USD strength in general helping to moderate the price of commodities.
–Carnage in the front end of the curve is causing an inversion of sorts in straddle levels. Consider levels on EDH’23, 0EH, 2EH and 3EH. The midcurves expire on the Friday prior to the quarterly EDH3, which is to say they all expire at essentially the same time (10-March 2023). Here are underlying futures prices and atm straddles: EDH’23 9692.0 with the straddle 123.0, EDH’24 9696.0 with the 0EH 9700^ 114.5, EDH’25 9722, 2EH straddle 107.0, EDH’26 9729.0, 3EH straddle 99.5. Nominal straddle levels are almost NEVER highest in the front. These are huge premium levels given underlying yields.
–The Fed previously prided itself on careful forward guidance; the market is saying that possible stresses are building which may require a much wider and more diffuse response. To be fair, the Ukraine war and lingering covid issues are large contributors of uncertainty, but the Fed seems to be missing a lot of market clues.
