Submerging inversion
March 9, 2023
–Ten year yield ended little changed despite yesterday’s tepid auction (2.7 tail, 3.985, 2.35 bid/cover). TYM2 settled -1 at 110-29+. However, the two-year note continues to surge, up 5.8 bps to 5.062%. 2/10 new low at -109 bps. Red/green SOFR pack spread (2nd year to 3rd year) settled at new low -91.5. Curve signals recession with historically inverted curve, but it has been that way for quite some time. Thirty-year auction today, I marked 30s at 3.871, down 1 bp yesterday.
–There was new huge buying early yesterday of TYM call spreads. TYM3 111.5/113.5cs 50 paid for 50k (settled 47) and 112/114cs 44 paid for 38k (settled 40 ref 110-295). Futures equivalent of nearly 16k buys, but TYM3 had been trading near the day’s high at 111-08/09 and ended up closing 110-295. There is heavy trade in SFRH3 and options which expire end of this week. Over the previous few sessions there was a synthetic straddle buyer of SFRH3 9500 strike for 6.5 (paid 4 in put covered 9498.5). Settled yesterday at 17.25 ref 9483.25.
–FFJ3 settled new low 9499.5, indicating a heavy lean for 50 bps at the March 22 FOMC. On a 50 bp hike, 508 bps or 9492.0 should be the new target price. NFP looms large tomorrow. Would probably have to come in sub-150 to shake the idea of a 50 bp hike.
