7 yr auction today
September 28, 2022
–Bear steepening continues this morning. On Friday, SFRH3 settled 9549, SFRH4 9572.5, SFRH5 9622.5 and SFRH6 9640.5. This morning (from Friday settle) H3 9556.0 (+7), H4 9584.5 (+12), H5 9620.5 (-2), H6 9626 (-14.5). The front end of the curve is starting to forecast an end of tightening, the back end is worried about lack of demand. At yesterday’s future settlement time, the two year was unch’d at 4.308%, while tens were nearly 4%, up 9.8 to 3.968 and thirties were +14 bps to 3.832%. There are many indications of uncertainty and illiquidity ahead. For example, I don’t think I have ever seen long-dated red and green euro$ straddles as high as they are now. My recollection may be suspect, but the 6th quarterly ED straddle used to be high if the nominal level was 120 to 125 bps. And that was with base rates higher than they are right now. Yesterday, EDH4 9550 straddle settled 161.5 with EDH4 9550.5. B/E 9389 to 9711; 538 dte.
–I’m sure I am taking this out of context, but saw this bullet point yesterday
FED’S BULLARD: DANGEROUS TO CHANGE INFLATION TARGET – COULD CAUSE CHAOS. I guess that would have been prescient if he had said it in the early part of 2020, before the Fed changed its framework to FAIT (flexible average inflation targeting). In any case, if we had been tiptoeing towards chaos, we’re now in a more purposeful stride. At this point central bank speakers are not making things better.
–Tens over 4% this morning and mortgage rates around 7%. Yesterday Case-Shiller reported the “first sequential drop in home prices since March 2012, or ten and a half years.”
–Some large TYX and FVX put spreads sold early yesterday morning: FVX 107/106ps sold 20k at 26, appears exit. In TY looks like rolls out of higher and into lower strikes: -10k TYX 110/109ps 18, -20k TYX 111.5/110.5 ps at 29. And a late USZ -10k 122/120ps at 38 (roll down).
