It’s the little things
May 13, 2022
–Yesterday I mentioned that EDZ2/EDZ3 one-yr calendar had made a new low at 13.0 on Wednesday’s close. Thursday’s settle was another new low at 6.5 bps (9698.5/9692.0). In fact, the first three one-yr spreads settled at new lows, with EDM2/EDM3 at 140 bps (high had been 182). While FF contracts still indicate two consecutive 50 bp hikes in June and July, the picture gets murkier from there. EDM3 remains the lowest contract on the strip at 9677.5 or a yield of 3.225%, which is consistent with a ‘terminal’ rate of around 3%. Again, consider EDZ2 and EDZ3 contracts which bracket EDM3…both are at higher prices, lower yields at just under 3%. With the sell off in equities and carnage in crypto, the market is both paring back estimates of the terminal rate and moving it somewhat forward in time. On a related note, the euribor one-year M2/M3 calendar is 163.5 bps (more tightening priced than US?!) and sonia is 100 bps, having declined from a high of 133.5. Sorta makes me want to dip my toe in the water by buying EUR.
–Yesterday I had also mentioned the expiring midcurve May straddle, 0EK 9662.5^ with EDM3 as the underlying contract. May midcurves expire today. On Tuesday, it had settled 16.5 with a breakeven of 9646 to 9679. On Wednesday, we traded a low of 9645.5 before coming back to settle 9662.0, and on Wed the straddle settled 12.0. I had thought perhaps on Thursday we’d test the new upper breakeven at 9674.5. As it turned out, we exceeded that level with a high of 9678 and a settle of 9677.5. So, both ends of the breakevens from Tuesday’s settle were essentially met. (That, as I recall is a Todd Schaefer line: ALL PRICES WILL BE MET). Yesterday, (Thursday) with just one day left, 0EK 9675 straddle settled 9.0. I guess we’ll see if 66 holds today.
–While inflation figures this week were higher than expected, the ten yr treasury vs inflation-indexed note spread declined to a new recent low 259 bps. In other words, by destroying asset prices, the Fed is succeeding in lowering future inflation expectations. Bravo. The meltdown in terra/luna stablecoins was dismissed by Yellen as not being large enough to be systemically threatening, although the WSJ notes that $1T of crypto ‘wealth’ has vanished in six months. On a human level it’s awful as message boards are now including suicide hotlines. Often, people comment that money from one sector is being pulled out and is flowing to another sector, as if the total remains the same. This isn’t a flow. It’s just gone. The other aspect of markets which is constantly underappreciated is that in some cases, a relatively inconsequential pocket of stress can be easily absorbed, and in other cases, it can spark a series of wildfires — if the tinder is dry enough. It’s always the stuff at the margins. And that’s the stuff that the experts typically shrug off. “Subprime: it’s a mile wide and an inch deep.”
–This is from the latest Cass Transportation report. It’s a sobering shift in tone:
“North American freight volumes went negative in April. And with spot rates falling and contract rates expected to follow suit, pricing power is shifting from fleets to shippers. In short, the freight cycle has downshifted with a thud, and the prospect of a freight recession is now considerable.”
https://www.nbc.com/saturday-night-live/video/jimmy-carter-on-inflation-cold-open/3007609
