Loss of support for long-dated USD assets?
April 13, 2023
–CPI slightly lower than expected at +0.1 with yoy 5.0% vs expected 5.1 to 5.2. FOMC minutes contained this assessment: “…the staff’s projection at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.” As other reports have indicated, a lot depends on the severity of tightened credit conditions, “…particularly because historical recessions related to financial market problems tend to be more severe and persistent than average recessions.”
–Ten year tailed about 2 bps, awarded at 3.455% vs 3.435 pre-auction. 30y bond (being auctioned today) was up 3 bps in yield (at futures close) to 3.651% while the five year FELL just over 7 bps to 3.478%. Red SOFR pack led the way, settled +12.5 on the day. This might be conspiracy theory type stuff, but it feels to me like long-dated USD assets might be losing some of their sponsorship. DXY edging to new lows. I’m not talking about “Bud Light” loss of demand, just a slight erosion of support. 30y auction bears watching. I would also note that bund/US ten year spread edged to new recent tights. I charted SFRU4 to ERU4 as a spread and noted that SFRU4 was 70 bps higher in yield than ERU4 just before SVB, but the spread went to zero in early April. (Last Nov SFRU4 was 120 bps higher). Tightening of these spreads suggests less USD support going forward? “This brand is in decline…”
–On the other hand, treasury vol has completely erased the surge related to banking problems. TY vol spiked over 12 in mid-March, now back to 7.7. One month ago TYM 114.5 atm straddle was 4’33 or 11.0 and currently TYM 115.5 atm straddle is 2’31 or 7.7.
–Jobless Claims and PPI today. Claims expected 235k. PPI expected 0.0 with yoy 3.0 to 3.2 from 4.6 last. Worth noting that WTI contracts closed at new highs for this calendar year yesterday. CLK3 83.26, +1.73 and CLM3 83.09 +1.60. The one-year calendar spread CLM3/CLM4 also closed at a new high 7.61 (83.09/75.48)….tight supplies in the near-term?
–3m libor set yesterday just over 5.25%. The high immediately after the end of the 2004/2006 hiking cycle was in July 06 at 5.52. The next big flare-up was to 5.725% in Sept 2007 as financial and other stresses on the system ratcheted up. It was August 2007 when Jim Cramer had his famous “They know nothing!!!” rant related to the Fed.
Speaking of which, Fed officials, and Warren Buffett, keep saying banking deposits are ‘safe’. It they’re not guaranteed, they’re not absolutely safe.
–One trade worth highlighting in SFR, buying of May SOFR call trees. New position of about 60k SFRK3 9512.5/9525 call spreads bought, selling an additional otm call to finance.
SFRK3 9512.5/9525/9550 c tree, took 2.5 credit, 5k
SFRK3 9512.5/9525/9575 c tree, took 0.5 credit, 35k
SFRK3 9512.5/9525/9587.5 c tree, paid 1 for 20k
Settles: SFRM3 9505.5
9512.5c 10.25
9525.0c 7.5
9550.0c 5.0
9575.0c 3.25
9587.5c 2.75
Works best with grinding rally over the next month, not a blow-up!
