Plenty of liquidity
July 14, 2023
–Core PPI yoy only 2.4%. New lows in the dollar index seemed to unleash buckets of liquidity with SPX +0.85% and the ten year yield down nearly 10 bps to 3.76%. The 2-yr note which had been over 5% a few days ago, fell another 12.7 bps to 4.613%. DXY had been over 104 in early June and ended yesterday at 99.77.
— On the SOFR curve new low settle in SFRZ3/Z4 spread at -162.5 (9474.5 +6.5/9637 +21.5). Previous low settles were -158.5 on March 9 and -161 on May 1. Low of the cycle in SFRU3/U4 was -177 on Jan18, and in SFRM3/M4 was -192 on May 4, and I believe the latter has been the low for any one-yr calendar.
–New recent low in SFRH4/M4 at -46.5. It’s pretty hard for a 3-month calendar spread to trade sub-negative 50, especially in what is supposedly a tightening environment. Lowest settle on this spread was -50.5 in mid-January.
–Large continued buying in SOFR call spreads, SFRZ3 9487/9500cs 2.5 paid 70k. SFRH4 9600/9700cs 10.75 paid 20k, bring aggregate position to about 80k.
–It’s been an amazing rally in fixed income. Some of the back contracts are trading similar to the immediate aftermath of SVB. For example, SFRM5 which was about 2 ¼ years forward settled at a low of 9632.5 on March 8 and rallied to 9672 by March 13, 39.5 bps. SFRU5 is about 2 ¼ years forward currently, and settled 9617 on July 6, soaring to 9675.5 yesterday, up 58.5 bps. Of course, action in nearer contracts is much different now vs the ‘banking crisis’, but this rally has been sparked by low inflation data which, due to base effects, was NOT completely unexpected.
–30y bonds ended at 3.894%, down 8bps on the day. The move above old highs at 4% appears (for now) to have been a false breakout.
–Speaking of bank issues, JPM, Citi, WFC, State Street and BLK all report today. Retail Sales on Tuesday.
