Bonds melting
October 21, 2022
–Yields continued to make new highs, with tens up 10 bps to 4.222% at yesterday’s future settlement, going into today’s November option expiration on treasuries. TYZ settled 109-115 and is currently 109-06 (5:50 EST) while USZ is down one full point this morning at 119-14. TYX 109p settled at 9/64 yesterday, an astronomical price for one day, but there are only 13k open. Stocks are trying to pretend that higher rates won’t affect forward valuations, but are also giving ground. SOFR contracts from March’23 to March’27 settled down 13 to 13.5.
–In the beginning of the week I noted that EDM3/EDM4 settled -80.5, a new recent low, and that the lowest any 1-yr calendar had settled in this cycle was -84. Yesterday, EDM3/EDM4 settled -65. SFRM3/SFRM4 settled -61. Still extremely inverted, but red and green (2nd and 3rd year forward) ED and SFR contracts are perhaps adjusting to the idea that rates might stay high for some time. (Near calendar spreads going bid).
–SFRZ2/EDZ2 settled at a new high 47.5. Given that ED to SOFR contracts are transitioning at 26 next year, the extra 21.5 bps can be attributed to turn-of-year pressure and credit concerns. SFRZ2 has 935k of open interest while EDZ2 still has 1.566m open, so it’s not as if the spread can be easily pushed around. The spread is there for a reason.
–Saw below tweet yesterday on the Fed’s liquidity swaps, which have jumped to $6.48 billion this week. While it may be worth keeping an eye on, these swap lines jumped to $450 billion during COVID, so this is a relatively minor blip so far. The Fed website says: “The swap lines are designed to improve liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress.”
https://fred.stlouisfed.org/series/SWPT
