April 12. Bonds shrugged
–Although there were several high profile events Wednesday, rates were little changed in the US. CPI was released in the morning at -0.1 and Core of 0.2, but yoy measures were above the Fed’s threshold: 2.4% and Core of 2.1%. Later in the day, the NY Fed released its Underlying Inflation Gauge (UIG) which also continues to push higher. The ‘full data set’ increased from 3.07% in Feb to 3.44% in March. The ‘prices only’ measure increased slightly from 2.21 to 2.23%. Prices of actual commodities were also in play yesterday, with crude oil breaking out to a new high. Clearly this move is related to mideast tensions, but I would note that the one year spread CLK8/CLK9 closed just below a new high with the near trading at a premium of $5.70 ($66.82 vs 61.12). This premium is more than 9% over the year. News reports that the Saudis had intercepted missiles over Riyadh was a contributing factor.
–Ten year note auction went off at 2.795, with the smallest percentage awarded to indirects since 2016. (Indirects are often thought as a proxy for foreign central banks). The eurodollar curve was little changed, though EDM8 closed -2.0 at 9766.0, the weakest contract on the board, getting hit after the FOMC minutes were released (EDM8 prints 9765 this morning). While some Fed officials viewed a trade war as a downside risk, for the first time zero participants thought the downside risks to inflation outweighed upside risks. In fact some participants thought a steeper tightening trajectory made sense.
–Implied vol continues to dwindle, with a notable sale of 12k USU 143p at 1’21. USU 145^ settled 4’54 or 6.9 vol. 5/30 notched a slight new low at 38.4 in spite of today’s 30y auction. The Fed, by many measures, is finally hitting inflation targets, yet there’s absolutely no inflation/term premium in the curve which is further emphasized by compressed implied vol. I would note that the Fed’s QT program this quarter features $30b/month of which $12b is MBS. While the Fed doesn’t hedge MBS, the private market does, yet this additional ‘supply’ isn’t translating into a vol bid.
