A lot’s priced in
March 30, 2022
–Another day, another day of flattening. 2/10 treasury spread briefly inverted but was +5 at the end of the day, with 5/30 just under 4 bps. However, the eurodollar curve from reds back, (starting with EDM’23) slopes ever higher in price and lower in yield. EDM3 still the lowest price/highest yield on the strip at 9679.0 or 3.21%. EDM4 is 9708 or 2.92% and EDM5 is 9739.0 or 2.61%. The red/gold pack spread is -66.75.
–The average of the first 4 SOFR contract prices starting with SFRM2 is 9782.5 or 2.175%. However, starting with SFRU2 the average is 9742.75 or 2.5725% which is above every treasury yield; 10s ended yesterday at 2.405% down 6.6 on the day. The exact level of 2/10 is rather inconsequential; the curve is inverted and will become more so over time until/unless stocks crater.
–Implied vol came out of the market, weighed by heavy call selling in FV and TY shortly after the pit opening. Here are three example of calls sold, each with an increase of open interest of 25k (new position sales): TYK2 122.5c from 30 to 35/64, settled 54. TYM2 124c also sold in the 30’s, settled 43 vs 122.10+. And FVM 114.75c sold initially at 37.5 to 38, settled 47.5 vs 114-12.25. Price action across rate products indicates a short term bottom unless tomorrow’s data is horrendous: The Fed’s preferred inflation measure is released tomorrow, Core PCE Prices yoy expected 5.5 to 5.6% vs 5.2 last.
–May June and July all have FOMC meetings (4th, 15th, 27th) so the next ‘clean’ FF contract is August, which settled 9841.5 vs the current Fed Effective rate of 33 bps. A contract yield of 1.585% minus 33 bps is 125.5 bps of cumulative tightening priced for the next three FOMC meetings. Some might say that if this pricing is reflected in the interest rate curve already, it has been thoroughly digested by stocks and housing and other asset classes. I don’t think so; you know what happens after digestion. I have a feeling markets will look very different by late summer.
