Curve and vol back to pre-SVB
June 7, 2023
–Main feature Friday was a more inverted curve with 2/10 around -83 bps, 4 lower on the day. That’s right around the level from the end of last year which was the most inverted since the early 1980s, until the early March plunge to -108 on fears of continued aggressive hikes. Then SVB hit, sparking a rally to -40. Despite skip/pause talk for the June 14 FOMC, the market perceives the Fed as extremely tight, though expected t-bill issuance is also a dynamic. Clarida helpfully opined that a skip in June doesn’t signify an end to hiking, though perhaps he was just talking his book. Like he did at the Fed.
–Implied vol in treasuries similarly slid back to pre-SVB levels with TYU right around 7%. All is right again.
–On the SOFR curve, reds (2nd year forward) were weakest, down 8.125 bps to an avg 9637.5 (3.625%) while blues (4th year) were actually up 0.5 to 9687.0 (3.13%). At a settle of 9489, June FF are signaling acceptance of a pause (will settle 9492 on no move vs 9481 on hike of 25). If the Fed skips June but hikes in July then FFN3 should settle 9488; yesterday’s settle was 9484.
–New buyer of 40k SFRZ3 9887.5 call for 2 yesterday covered 9510.5 with 5 delta. Settled 1.75 vs 9504.5. Buyers of strikes around 1% and lower is a continuing theme.
–China exports reportedly lower than expected, damping ‘re-open’ hopes. US consumer appears to have run out of steam.
