Today’s missing hike has been priced into SFRZ4
September 20, 2023
–All treasury yields ended at new highs except for the long bond, with 2s up 4.5 to 5.105%, 5s up 6.0 to 4.52% and 10s up 4.8 to 4.365%. The 30y ended at 4.424, up 3.0, just a couple of bps off the high. Once again new contract lows in SFRH4 to SFRZ5, with H5, M5 and U5 settling down 9 on the day (weakest). Even on new lows, open interest is declining in SOFR: Z3, H4, M4, U4 lost a combined 77k contracts, more indicative of long liquidation than new sellers.
–It’s FOMC day, widely expected to result in a policy skip with the door left open for a November hike. 2024 dots for growth and FF target will likely both be revised higher. FFX3 settled 9459.5 or 5.405% just 7.5 bps above the current EFFR, so as of yesterday, even the November meeting leans towards the idea of the Fed being done. SFRZ3 settled 9453.0 (-0.5). More important has been price action in forward contracts, which says more about duration than level. Consider SFRZ4: on 8/28 it settled 9564.5, by 9/1 it was 9581.5, and yesterday settled 9539.0. There’s your forward restraint being priced in with a ‘hike’. A fall of 24.5 bps since 8/28! And, if measured from 9/1, a plunge of 42.5. Of course at yesterday’s settle of 4.61%, there is still significant ease priced into next year, but not in the category of ’emergency’ rate cuts. That’s not to say that large cuts couldn’t occur, for example there is continued buying of SFRM4 9600/9700 cs, yesterday about 20k for 7.5 (settled 7.25 ref 9480.0).
–I attached a chart of SFRZ3/Z4/Z5 butterfly which has rumbled from -140 since the start of June to -22 yesterday, as SFRZ4 withdrew from the idea of aggressive easing. I also added a chart of Russell2k to SPX ratio, as many have pointed out the relative weakness of small caps. Are these two charts consistent? Perhaps so, as the fly reflects higher for longer, which will kill prospects for small cap companies that need to roll debt next year.
