2/10 pressing new lows
June 27, 2023
–Another new low yesterday in 2/10 at futures settle; I marked at -101.6. Attached is a chart showing the 2004/2006 tightening cycle in 2/10 vs current. The 425 bp FF increase in the first episode ended in June’06. The initial low in the spread was in Feb’06 at -16, which was followed by a solid bounce, but the ultimate low was -19 in November. In the next year and a half 2/10 surged to +207 as the GFC took hold (not shown on chart)
In the current example, we’re about 100 bps MORE inverted. The early March low was -109, followed by the SVB bounce, and now retesting lows.
–On the SOFR curve Z3 and H4 were weakest contracts, both settling -1.5 (9477 and 9508). Reds were +4.5 and greens +5.0. The market continues to respect the Fed’s restraint. Stocks sold off in end-of-quarter jockeying.
–Somewhat interesting summary by Gita Gopinath of the IMF at the ECB forum in Sintra. She says 1) sticky prices remain too high and inflation is taking too long to come down, requiring more commitment by CBs 2) Higher rates can create financial stability stresses and CBs are not equipped to handle insolvent borrowers 3) Post-pandemic there are more persistent risks to upside inflation.
[sounds like a recipe for financial crisis]
–5yr auction today. Main event in Sintra is tomorrow but there may be some headlines today. Durable Goods and New Home Sales in US, along with Consumer Confidence, Richmond Fed Mfg and Dallas Services
