Bear market
June 30, 2023
–US rates jumped yesterday with the 2y yield up 15 bps to 4.872%, and 10s up 13.4 to 3.85%. The final reading of Q1 GDP was 2.0% vs expected 1.4% with a price index of 4.1%. Jobless Claims lower than expected at 239k. August FF settled 9471.5 (-2.0) or 5.285%; a hike of 25 bps at the July 26 FOMC would yield a final settle of 9467 to 68. SFRZ3 settled -12 at 9460.5. That contract has swung from pricing end-of-year easing to hikes just since May. On May 10 the close was 9579.5, so that’s 119 bps in a month and a half. Weakest contracts on the SOFR strip were SFRH’25 and M’25, both plunging 21 bps to 9624.5 and 9638.5. These prices are indicative of lower rates in 2025 of course….but much less lower after yesterday.
–There was a large block trade, sold 67k SFRZ3 vs bot 36.7k FVU3 at 107-135, approx $1.58m DV01. I posted the attached chart SFRZ3/SFRZ5 as a proxy for the spread. At the time Z3/Z5 was printing -202.5 but it came back to settle -194. From this morning’s prelim open interest, the FV part looks new as OI rose 27k, but that’s not certain since TY OI was also up 48k. SFRZ3 open interest was down just 2600 contracts.
–The 30y bond closed at 3.91%, up a little over 10 bps. There are three tops around 4%; a close above 4% would likely see follow-through to test last year’s high of 4.4%
–Thursday was an extremely bearish day in the rates complex. New lows in most contracts punctuating a huge selloff since early May. Vol was higher in treasuries even in front of the holiday weekend; I marked the atm USU straddle at 4’38 from 4’24 Wednesday, from 10.8 to 11.6. Previously, expected rate hikes affected front contracts but back-end yields stayed relatively calm as the curve inverted further. Indeed the curve DID invert further, but the jump in longer dated treasury yields is likely a headwind for stocks.
–Eurozone inflation was 5.5%, but Core stubbornly high at 5.4, up from the last reading of 5.3%.
–Today US releases PCE prices, expected 3.8 to 3.9% from 4.4% last. Core expected 4.7% from 4.7.
