2/10
December 29, 2022
–Weakness in both stocks and bonds yesterday with SPX -1.2%, Nasdaq Comp -1.35%, and the ten year yield up 3.6 to 3.885. with the 30yr closing in on 4% (3.974). The standout feature was curve steepening, with the 2/10 spread slightly breaking a downward sloping trendline in place since October of last year, ending at -47. The low on 12/6 was -84. Some of the near one-year SOFR calendars also made new recent highs. For example, on Dec 7, SFRU3/SFRU4 (the most inverted 1-yr calendar) was -155 at the low. Yesterday it settled -126. SFRH3/H4, which had gotten at low as -101.5, settled yesterday at -79.0, essentially removing a 25 bp ease from that forward year. If the Fed can convince the market that eases are not forthcoming, then front spreads should continue to grind higher. In a way, the question becomes, if the Fed stops and holds for, let’s say three quarters, then where is the pivot on the curve? If the Fed hikes again, and EFFR goes to 458 and stops, then H3 (9510.5), M3 (9507.5), U3 (9523.0) would be too low, and the next few contracts past Z3 (9551 or 4.49%) would be too high. That’s not a forecast, though I could easily see that outcome. Would something like a sale of SFRZ3 9550 straddle at 98.5 bps provide enough of a cushion either way? Ultimately it might, but there are a LOT of possible landmines lurking out there.
–Today’s news includes Jobless Claims expected 225k and the 7yr auction.
