Dismissing credit concerns
April 18. 2023
–Another weak day in interest rate futures. Red pack (SFRM4 thru H5) again led the way, settling down 11.75 on the day. On Thursday April 13, SFRM4 settled 9659.0. Yesterday it settled -12.0 at 9632.5, and is therefore down 26.5 in two sessions. SFRU4 was actually the weakest contract yesterday, settling -12.5 at 9662.0. The most inverted one-yr calendar is SFRU3/U4 at -146; last Thursday it was -151.0. Projected easing is still being fairly aggressively priced, even with the sell-off. The ten-yr yield rose 7 bps yesterday to 3.587%. 2/10 is -60. China’s better than expected 4.5% Q1 GDP is helping stocks this morning.
–There are many indications that bank failures are being dismissed as a “one-off”. VIX closed 16.95, lowest since the start of 2022. Some of the weakest financial names sported strong reversals off the lows. For example, Schwab was up nearly 4% on solid volume with an outside range day. However, ytd losses for the regional banks are still rather severe as the table below indicates (I pulled it yesterday morning, so probably as of Friday’s closes). Of the 19 worst performers in the S&P, 12 on that list are either financials or insurance. The flight-to-quality bid in treasuries has surrendered. However, I think there’s another way to look at it, which is that the Federal Gov’t is trying to prop up the regional financials, in the same sort of way that the SPR was drained to keep gas prices low. Confidence in the treasury market is, perhaps, eroding as the Federal Gov’t spends resources as if the well is bottomless. Is that a reasonable thesis for stocks maintaining a supported bid, while bonds stumble? Wednesday, the red-headed stepchild 20y bond is auctioned. We’ll see what sort of demand there is.
–If, and of course it’s just a hunch, the treasury market is vulnerable, then perhaps the Fed feels compelled to be more aggressive in terms of its own credibility. Not sure, but FFM3 settled 9492.0 or 5.08%. If the Fed hikes 25 in May, then the new EFFR will be exactly 508. FFK3 settled 9497.5 so the May hike isn’t completely priced, but it’s getting darn close.
–From a YahooFinance story:
Houston and Dallas had 18.8% and 17.2% of office space sitting empty at the end of 2022, according to the figures from CoStar and JPMorgan, well above the national average of 12.5%. New York, San Jose, San Francisco, and Chicago had vacancy rates of 12.3%, 12%, 16.4%, and 15.1%, respectively.
The article notes that excess space was built in the era of low rates; Houston alone has $1b of CMBS due this year.
https://finance.yahoo.com/news/houston-dallas-lead-the-country-in-office-attendance–and-empty-office-space-125019682.html
