Do long end rates need to be more restrictive?
August 29, 2023
–Market has become more convinced that another 25 bp hike is likely before year end. Near contracts are clustered around 9450 or 5.5%. FFX3 settled 9450.5, SFRU3 9454 and SFRZ3 9450.5, all new low settles (since early March). Current Fed Effective is 5.33%. The two-year auction went off at 5.024%; two’s now seem comfortable around 5%, after having spent Q2 bouncing around 4% post-SVB. In 2006 at the end of the hiking cycle, fives and tens had gotten close to or slightly above the terminal 5.25% FF rate. Currently 5’s are 4.39% and 10’s 4.21%. On the other hand, the 30y mortgage rate is well above the 2006 level.
–Overall, yields eased slightly yesterday. The ten-yr fell 3.1 bps to 4.208%. Seven-yr auction today. Everything on the SOFR strip from SFRZ4 back was up 4 to 5 bps in price. Greens, blues and golds (3rd, 4th and 5th years forward) are all within a few bps of each other around 3.75%. Grn pack 9624.63, blue pack 9630.25, gold pack 9626.5.
–Today’s news includes JOLTS, expected 9500k, and Consumer Confidence, expected 116 from 117 last. Federal student loan debt repayment starts Oct 1. I don’t know if those rates adjust, but for the 2023/24 school year, the rate is currently 5.5%. To be fair, since education is a long dated asset, one might think it’s more appropriate to price it close to 10s.
