Bizarre
August 2, 2023
–Bold move by Fitch to downgrade US from AAA to AA+. There will certainly be severe retributions against the company. In 2011 when S&P did the same thing, the CEO was booted faster than a Ukrainian prosecutor. [well, son of a bitch, he got fired]
From Wikipedia:
In order to mend its relationship with the US government, S&P asked its then-CEO to step down, a mere 18 days after the US was downgraded. S&P announced on August 23, 2011, that Deven Sharma would step down as a Chief of Standard & Poor’s effective September 12, 2011, and would leave the company by end of the year.
Over/under on Paul Taylor’s time left at Fitch?
–Here’s a tweet by Larry Summers: “The US faces serious long-run fiscal challenges. But the decision of a credit rating agency today, as the economy looks stronger than expected, to downgrade the US is bizarre and inept.”
“Bizarre and inept?” Federal tax receipts are down 5% yoy and the Federal gov’t is borrowing $1.9T in H2. The gov’t has decided not to refill the drained SPR because prices are high. Certainly LOOKS like we’re on a “permanently high plateau”, right Larry?
–This morning risk assets under pressure. Oil at new high with CLU2 over $82/bbl.
Yesterday:
–Steepener as 30yr yield makes a new high for 2023 at 4.102 (+8.9 bps). Last year high 4.245. DV01 on USU is about $141 for $100k, so a test of 4.25 should be about 2 points lower or 121. (USU settle 122-31). Two year yield was only +3.4 bps to 4.908. Tens also above 4% (4.043 at futures settlement)
–As a small indication that the market is showing some respect for this move: SFRZ4 settled -5 at 9582 and the 0QZ3 9587.5^ settled 79.5 vs 80.5 on Monday (-1). In SFRZ6 the contract settled -9 at 9650, and the 3QU 9650^ settled 67.5 vs 66.75 on Monday. The 3QU 9650^ settled 66 on Monday. The point is that premium on more deferred contracts strengthened on a relative basis as the curve steepened. 2/10 + 5.6 to -86.5 and 5/30 +2.2 to -14.2.
–Today brings ADP expected 190k
–ISM Mfg was a bit weaker than expected yesterday at 46.4 with prices 42.6, but weaker data elicited no buying in longer dated treasuries.
–End of the day there was a DV01 $1m FV to WN steepener. Prices 106-190 vs 130-10.
–Early in the session a seller of about 30k SFRH5/M5/U5 fly at -7.5. Settle prices 9607/9623.5/9632.5 so settled -7.5. This morning’s open interest suggests new position: H5 +33k, M5 +72k, U5 +10k. The trade doesn’t seem to have much of a tailwind in terms of curve roll as the fly in front, Z4/H5/M5 settled -8.5
