Curve flatter on minutes
January 4, 2023
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–SOFR curve flattened, partially in response to FOMC minutes. SFRM4, the weakest contract, -4 at 9538, SFRM5 +2 at 9669.5, SFRM6 +3.5 at 9683.0 and M7 +3.5 at 9676.0. Again, note that all contracts from June’25 to June’27 are within a 15 bp range, 9669.5 to 9685. (Consistent with terminal range 3.0 to 3.25%)
–From the minutes: “Sev’l observed that circumstances might warrant keeping the target range at its current value for longer than they currently anticipated. …Sev’l noted the risk that, if labor demand were to weaken substantially further, the labor market could transition quickly from a gradual easing to a more abrupt downshift in conditions. …All members affirmed their strong commitment to returning inflation to their 2 pct objective.” So that’s, “on the one hand, on the other hand”
–SFRM4/M5 posted a new low at -131.5. SFRH4/H5 is the most inverted spread, now at -153.5. The last hike was in July 2023. About the longest period between last hike to first ease is 9 months. Equities remain pressured with Nasdaq Comp down another 1.2%
–There was some discussion about the lower usage of the Reverse Repo facility (money mkts had shifted to higher yielding bills and private-mkt repo). This discussion is related to the ample (or large excess) reserves regime. The excerpt below indicates, to me anyway, that balance sheet run-off is going to end soon. Emphasis added. Details will likely be forthcoming at the Jan 31 FOMC.
Several participants noted that, amid the ongoing balance sheet normalization, there had been a further decline over the intermeeting period in use of the ON RRP facility and that this reduced usage largely reflected portfolio shifts by money market mutual funds toward higher-yielding investments, including Treasury bills and private-market repo. Several participants remarked that the Committee’s balance sheet plans indicated that it would slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level judged consistent with ample reserves. These participants suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public.
–Today’s news includes ADP expected 110-115k. Jobless Claims expected 220-225k. S&P Composite PMI 51.0.
