Flight to safety fizzles
August 3, 2022
–Large jump in yields as reaction to Pelosi’s Taiwan trip fizzled and both Evans and Mester indicated support for 50 to 75 at the September meeting. Current Fed Effective has printed both 232 and 233. another 50 would be 283 or 9717. FFV2 settled 9706.5…pretty close to the midpoint between 50 and 75 in terms of pricing for the Sept 21 FOMC.
–Green pack (3rd year out) was the leader in terms of yield increase, with the price down 25 bps to just under 9732. That price is still 109 higher than EDZ2 at 9623, the lowest contract on the strip. EDZ2 is consistent with FF of about 3.5% by year end. Jan’23 FF contract settled 9661, down 10 on the day) or 3.39%. Instead of the green pack, let’s consider the average price of the four 2024 contracts: EDH4 thru EDZ4 averages 9716 or 2.84%, consistent with a FF target of 2.5 to 2.75%. That’s how we get to a soft landing: Higher rates to slow things down and then lower rates to cushion the blow. It’s all in the handbook: Fed Presidents for Dummies.
–After making new highs for the move, tens and bonds had large outside ranges and closed near the lows. Bearish signal on long rates in front of next week’s auctions of 3s, 10s, 30s. 2/10 spread made a new low of -33 bps. Twos closed 3.077% while 5s, 10s and 30s are all under 3%. Strong temptation to buy the steepener if the market gets a bit closer to pricing 75.
–News today includes ISM Services expected 63.5 from 55.3. Factory Orders as well.
