Can 2/10 get above -52?
December 21, 2022
–The days get longer from here!
–Driving factor yesterday was Japan’s surprise widening of band on the 10yr JGB to 50 bps, essentially a hike. JGB went from 25 bps to 42.
–Steepening result in the US with 2/10 at -58 bps, highest since mid-November with the historic low of -84.3 in between (-88 during the day). Downward sloping trend line comes in around -52, which started in October or last year around +127.
–I’ve been focused on the LOW contract of the SOFR curve, which is currently front March’23 at 9515.5 or 4.845%, about 50 higher than the current EFFR of 433 bps. However, it’s also interesting to note the HIGHEST contract on the curve which is currently Z’25 at 9701 or 2.99%. SFRM5 (2 quarters before Z’25) is 9698.0 and SFRM6 is 9696.5. So, not much of a difference, but there has been an awful lot of buying of the 9700 or 3% strike…and the highest forward contract is barely above that level. As evidence of the current positions, note that SFRU3 9700c has 103k open and SFRZ3 has 134k open.
–Another note related to steepening of 2/10 is the nominal level of sofr midcurve straddles. For example, 0QM 9650^ settled 86.5 ref 9645.5 in SFRM4. However, 3QM 9700^ settled 80.0 vs 9696.5 in M’26. Though both expire on the same day, the straddle on the further contract is nominally cheaper. If the curve really does start to dis-invert then the back end might be expected to be more volatile. Of course, the current curve shape argues for the front to be more expensive (due to roll), as SFRH4/M4 is -38 (9607.5/9645.5) while the roll in back is much more modest at +2.5 (9699.0/9696.5).
–Today features 20y re-open auction of $12 billion; late WI was 3.93/3.925. Existing Home sales expected 4.2 million rate from 4.43m last. Consumer Confidence.
