Bear market
February 22, 2023
–Big jump in yields Tuesday. From Friday’s close, ten-yr up 12.7 bps to 3.951%. Fives led the way (in front of today’s auction) with a surge of 13.8 bps to 4.171%. On the SOFR strip reds thru golds were -13.5 to -16.5.
–Ten year treasury to tip breakeven notched a new recent high at 248 bps. Worth noting: 5, 10 and 30 year tips are between 1.52 and 1.59%, a respectable level for real yields and in the upper half of recent ranges. (Powell often mentions the need for positive real yields across the curve).
–In the front end, near spreads made new highs. Notably, SFRM3/U3 finally settled positive for the first time since April, at 0.5 (9465.5/9465.0). On Feb 1, the June/Sept calendar was -19, since then it’s been straight up as the market accepts a stingy Fed that’s higher for longer. Having said that, SFRU3/Z3 is still -21.5 (9465.0/9486.5). As an aside, at the end of January paper was selling huge amounts of SFRZ 9550 and 9562.5^ at 80 to 84 bps with futures around strikes. Yesterday SFRZ3 settled 9486.5, 76 lower than the 9562.5 strike. The 9550^ settled yesterday at 96.25, while the 9562.5^ settled 103.0.
–Calendar rolls are now active in treasuries, which might have an influence on the following: Open interest in aggregate was up in every treasury contract… by a lot: TU +96k, FV +116k (approx 2.6% increase), TY +55k, UXY +55k, US +36k and WN +23k. Increases in open interest are a sign of trend strength, as is an increase in implied volatility as the market moves in tandem with trend. Yesterday TYJ vol up to 7.8 (2’02), near recent highs and USJ 13.9 (4’02), a new recent high. There was a new buyer of 50k TYM3 108/107 put spread, mostly at 10. Settled 11 ref TYM3 111-18. Top strike is approx half a percent away in yield which doesn’t even seem that far in this environment (consider move cited above in SFRZ3, 75 bps in 3 weeks).
–Five year auction today followed by the Fed minutes. In the wake of the last Fed meeting, which was followed in 2 days by the massive payroll number, Fed officials have uniformly tilted toward further restraint. Minutes likely helped shape the message.
