Curve plunge
October 28, 2021
–Bank of Canada ended bond buying and accelerated the timetable for rate hikes, causing a waterfall of selling in the front end. In eurodollars the red/gold pack spread (2nd to 5th year) plunged an astonishing 17.5 bps with reds down 3.25 while golds surged 14.375. The spread made a new low for the year at 71 bps at yesterday’s settle and now prints 64. The high of the year was 182 at the end of March. The high in early June was 163, from there it started to fall going into the hawkish dot surprise at the June FOMC; the low was 94 in mid-July for a total 69 bp drop. By late Sept it had recovered to 122.5. At this morning’s 64 the move is nearing the magnitude of the previous one. The fall in 2/10, while dramatic, has not been quite as large. From June high to July low the move was 48 bps, from 145 to 97. October’s high was 129 and we’re just testing the July low, currently at 99. The low at the very start of the year was 80.
–Near one-year calendars made new highs with EDZ’21/Z’22 up 3.5 to 62.5. The peak has moved forward, with both EDH’22/H’23 and M’22/M’23 at 78.5. After a week like this one on the old floor, a sign of the carnage would be how many seats had been posted for sale.
–While the Fed has taken great pains to set a kinder, gentler path of communication on policy in order to avoid this sort of disruption, the BoC one-upped the Bank of England with a blunt message that overwhelmed the short end. The takeaway of the market is that rate hikes will tamp down inflation and growth, but supply issues will make the Fed’s job much harder. 2013’s taper tantrum saw the 4th ED contract trade to a low of 9932 from above 9960. This morning, EDU2 is in the 4th quarterly slot, and has printed 9930.
–Advanced Q3 GDP today expected 2.7% but the Atlanta Fed GDPNow is just 0.2%. Prices expected +4.2%. Jobless Claims 290k.
