Demanding a larger rate premium for long-term bonds
July 1, 2024
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–Friday’s late bond meltdown is seeing follow-through this morning with a print of 117-06 in USU4 (settled 118-10, late Friday low was 117-14). This, even as PCE prices showed no inflation month/month, with headline and core both 2.6% yoy. The 10 year breakeven (treasury/tip) has been steady at around 2.25% for the past two months (4.34%/2.06%). This morning’s news includes ISM Mfg expected 49.1 from 48.7 last. Powell speaks at the central bank economic forum in Sintra tomorrow.
–5/30 spread ended at the highest level since early April at +17.3 bps, up 4.6 on the day. On the SOFR strip, the red/gold pack spread (2nd to 5th year) rose 5.25 bps to -18.125. (Red pack 9606.25 and golds 9624.375). Every contract from March’26 to March’29 is between 9613.5 and 9633.5…not deviating much from 3.75%. Obviously things can change, but in comparing the long-term inflation expectation embedded in the 10y breakeven to forward rates on the SOFR curve, a real rate of around 1.5% is being projected.
–The most inverted one-year calendar remains the front SFRU4/U5 at -103 (9485/9588). In Fed Funds the front FFQ4/Q5 is -108 (9469.5/9577.5) so the market is currently comfortable with the idea of four eases over that time frame.
–Macron’s early election gambit failed. Political uncertainty growing globally.
