Push-back by Williams Flattens Curve
December 19, 2023
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–NY Fed’s Williams pushed back against the idea of near term rate cuts on Friday, saying it’s too early for the Fed to be considering lowering rates. In response, the yield curve flattened, with the 2y yield ending up 5.7 bps at 4.451% and tens essentially unchanged at 3.926%. 2/10 treasury spread made a new recent low of -52.5 bps. In the latter part of October it had gotten as high as -15. I marked the 30-yr yield at 4.025% at the futures settle, but it ticked below 4% before the end of the day.
–December options expired on SOFR. While SFRZ3 pegged exactly at the 9462.5 strike, SFRZ4 settled 9609, up 32.5 on the week. The previous Friday, 8-Dec, Z4 settled 9576.5 and the 0QZ3 atm straddle was 22.5. Another instance where the straddle was underpriced relative to actual movement.
–There have been a lot of adjustments in SOFR options: exits of longs — for example about 20k each of SFRM4 9600/9700c sprds and U4 9700/9800c spreads sold. And on the downside 25k SFRH4 9487.5/9475/9462.5/9450p condor exited (sold) at 4.25.
–New low in SFRM4/M5 at -129 (9533.0/9662.0). The most inverted one-year spread is H4/H5 at -148 (now the front spread). SFRH4/M4 settled -41 and M4/U4 at -39. Butterfly at -2 seems a bit expensive.
–BOJ coming up with expectations that policy is held steady until the new year.
