A chance to replenish SPR
November 8, 2023
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–Crude oil continues to slide lower. Yesterday CLZ3 down 3.45 to 77.37 and this morning it is 76.65.
–Good three year auction yesterday but 10s today and 30s tomorrow will likely be more challenging. Last month’s ten year auction was at 4.61%; when-issued was 4.555/4.50% at futures settlement time yesterday. Powell slated to give opening remarks this morning at 9:15 at the Research and Statistics Centennial (“We can make one hour feel like 100 years”). Ten year yield yesterday was down 9.5 bps to 4.569%.
–Consumer Credit was about as expected at $9.06b, but the NY Fed had this clip relating to increased delinquencies:
The transition rate into delinquency remains below the pre-pandemic level for mortgages, which comprise the largest share of household debt, but auto loan and credit card delinquencies have surpassed pre-pandemic levels and continue to rise. While the growth in auto loan delinquency has appeared to moderate over recent quarters, credit card delinquency rates have risen at a sharper pace. Even though the increase in delinquency appears to be broad based across income groups and regions, it is disproportionately driven by Millennials, those with auto or student loans, and those with relatively higher credit card balances.
[shouldn’t be too surprising; St Louis Fed says Comm Bank Interest on Credit Cards Assessed Interest is a whopping 22.77%]
https://fred.stlouisfed.org/series/TERMCBCCINTNS
–SFRX3 settled yesterday at 9463.0. SFRZ3 at 9462.0. SFRZ3 9462.5^ has compressed from 9.0 on Friday to 7.0 yesterday. With over a month to go SFRZ3 9462.5 call settled 3.25 (and according to SFRX3 should end up at least 0.5 in the money), while 9550c settled 0.75 and were 0.5/1.0 yesterday. 1×4 flat with a bit over a month to go?
–There are more targeted SOFR bets being placed. Example, +10k SFRF4 9468.75/9475/9487.5/9493.75 c condor for ~1.25. Breakeven 9470 and 9492.5, max gain 5 bps. Requires perception of ease. (Jan expiry on SFRH4 underlying).
+25k SFRJ4 9518.75/9537.5/9562.5/9581.25 c condor for 2.0. April expiry on SFRM4 underly which settled 9499.5. Sweet spot between 9537.5 and 9562.5 suggests about 75 bps worth of cuts. EFFR currently 5.33%, cut of 75 should be 4.58% or 95.42. There are FOMC meetings on May 1 and June 12 after April option expiry which will affect the SFRM4 price, so this trade may be predicated on the idea of 25 bp cuts in Jan and March, with relatively high odds of 25 cuts at the next two FOMCs.
