Bear Steepener?
September 1, 2022
–Whether related to end of month adjustments or belated realization that increased QT might remove the marginal bid for treasuries, there was a late drop (post-settlement) in long treasuries and stocks. For example, WNZ2 settled 149-16 and was a point lower an hour and a half later at 148-13, and last print this morning is 148-03. This morning’s SOFR curve: SFRU2 -1, U3 -2, U4 -3, U5 -5, U6 -7.5. The market has tended to flatten on moves to higher rates. Just before Jackson Hole a BBG article was highlighting the idea that flattening could continue (and it certainly has in 5/30). The point is simply that IF the curve were to bear steepen, it would likely cause maximum pain.
–Along the same theme, there was a late buyer yesterday of 10k block, green/gold Dec, SFRZ4/SFRZ6 at -15.5. Settled at -15.0 (9704.5/9719.5), but before the end of the screen session it was -11.5. Ten year treasury yield at futures settle was 3.13%, up 2.3 on the day, and the thirty year was 3.25%, up 3 bps on the day. If the Fed were to hike 75 in a couple of weeks, then EFFR will be 308. Though short end curves still forecast Fed eases by next year, the prospect of positive carry is by no means guaranteed. Is it that far-fetched to project 3.75% long bond yield by year end? A point in US is worth about 6 bps. OTM US puts aren’t cheap, but may be worth a look in terms of protection.
–ADP much lower than expected yesterday at 132k. NFP tomorrow expected 298k. Today’s new includes ISM Mfg 51.9 vs 52.8 last. Nonfarm Productivity and Unit Labor Costs as well, 2Q final.
