It’s all ‘money-good’
March 21, 2023
–US is looking at ways to guarantee all depositors, which should effectively end the worst of this crisis. However it doesn’t alleviate funding problems for long-dated assets in an inverted curve (like commercial real estate). In front of tomorrow’s FOMC, April Fed Funds settled 9524.5, a price between 0 and a hike of 25 tomorrow; leaning toward the latter. But FFJ4, one year hence, settled 9629.5, a spread of -105 bps, which indicates easing is on the way. Good for an eventual return to a positive curve, but probably not all that good in terms of breaking the back of inflation. As QT unceremoniously draws to a close, the long end of the market likely will test higher yields, due to both increased inflation expectations and a lot more issuance.
–Recent action has sparked a panic bid in vol for shorter maturity contracts. On the treasury curve, US vol is only double FV vol as the latter has exploded higher on a relative basis, even though the DV01 of US to FV is 3.4 to 1. Now is the time to favor long US vol vs FV. In the SOFR curve, straddles eased. SFRM3 9550^ was sold in decent size around 93.5 and settled 90. There was a buyer of 9500/9600 c 1×2 for 4, settled 4.0 (67.50/31.75). With a settle of 9551 in SFRM3, that means time value in the 9500c is 16.5 (the 9500p settled 17) and the 9600c call time value is 31.75; extraordinary skew for equally out-of-the-money options.
