Higher for longer; new high SFRZ4/Z5
April 17, 2024
***************
–Powell… “The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence” that inflation will return to 2%.
–The higher for longer stance was clearly reflected by the SFRZ4/SFRZ5 calendar spread which traded huge volume and settled at a new recent high of -57.5, up 6 bps on the day. SFRZ4 was unchanged at 9509 and Z5 fell 6 to 9566.5. This morning’s prelims show that open interest rose 20k in Z4 but a whopping 133k in Z5, to 809k. There was also an article dated Monday on Politico (linked below) titled, ‘Trump trade advisors plot dollar devaluation’. (thanks BP). ($ deval probably would result in higher US long rates). Note: $/yen 154.60. And the Korean Won has also depreciated quickly from 1330 in the beginning of March to 1400 yesterday. Stronger USD should be deflationary for the US, but Core Services have been the problem, not goods. The Asian currency crisis was in 1997/98…
–Yields yesterday rose, except for SFRZ4! Two year +3 bps to 4.964%. Tens +2.7 to 4.657%. 20-yr auction today. On the SOFR curve, unsurprisingly SFRZ5 was the weakest contract, -6.0. SFRM5 to SFRM8 down 3 to 5.5 apart from Z5 (-6).
–Flows to hedge against a plunge in risk assets aren’t particularly prevalent, though VIX perked up over 19. Yesterday there was more (new) SOFR call spread buying, adding 30k to Z4 9600/9700cs for 6.75 (settled 6.5) and 15k SFRZ5 9750/9850cs for 8.25 (settled 8.0 ref 9566.5). Yesterday I mentioned a buy of 40k Z4 9700/9800cs; that was incorrect and was probably an intercompany transfer, OI didn’t change. Note that even with a move to new high yields, treasury vol eased; there were some chunky TY put sales. Indication that yield surge has abated for now. Fear of higher rates subsiding.
SUMMARY
–Huge Z4/Z5 buys. Settle +6 at -57.5
Z5 75/85cs 8.25 for 15k
Z4 60/70cs 6.75 for 30k
TODAY: 20y auction, Beige Book, TIC data
https://www.politico.com/news/2024/04/15/devaluing-dollar-trump-trade-war-00152009
Below is chart of Korean Won and Indonesian Rupiah
