Weak stocks, steeper curve, low liquidity
April 12, 2022
–Massive steepener again on Monday as the curve adjusts to the idea of balance sheet reduction beginning in May. On the euro$ strip, the red pack (2nd year forward) closed UP 4.375 bps and golds, 5th year settled DOWN 11.875. These moves are spectacular. On the treasury curve, 2’s yield fell 1.8 bps to 2.504% and tens rose 6.5 to 2.776% with an auction this afternoon (re-open tens). The high point on the treasury curve, the 20yr, was sporting a yield just over 3% yesterday. AMZN $12.75 billion bond offering (with a callable 40y) was a factor as well. SPX fell 1.7% and Nasdaq Comp 2.2%, going into Thursday’s option expiration.
–Liquidity is faltering, perhaps accentuated by the holiday week. At noon Chicago time on the eurodollar strip, there was not one contract bid or offer greater than 1000 contracts. At the same time on the SOFR strip just two contracts had a bid or offer greater than 1k, SFRM2 and SFRZ2, and those were less than 1500.
–Today brings CPI, expected 8.4% from 7.9% with Core 6.6 vs 6.4. The White House already warned of an extraordinarily large number. NFIB small business optimism is also released, expected somewhat below the last reading of 95.7. While not a particularly important number, the fact that many confidence measures have turned down (and that BofA is forecasting a “recession shock”) makes it noteworthy. Also today, Brainard speaks again and will take questions (12:10). Chicago’s Evans helpfully guided that a rate hike of 50 might occur in May, (after it has been priced for weeks).
–EDU3 was the strongest contract yesterday, settling +6 at 9659 while EDM3 was only up 3.5 at 9657.5. Therefore the calendar EDM3/EDU3 was -1.5. On the SOFR strip, the net changes were the same, +3.5 and +6.0, but the calendar is +0.5 (9685.5 and 9685.0). The end of June ’23 is when libor ends and euro$ contracts will transition into SOFR contracts. Perhaps the higher SRFM3/EDM3 spread relative to September is the last hurrah indicating the credit aspect of euro$s. Of course, JNK and HYG (hi-yld etfs) both made significant new lows yesterday, so it’s not hard to find clues that credit problems are popping up (which might also be a topic in bank earnings reports. JPM and BlackRock Wednesday. Citi, Wells, GS and MS on Thursday).
