Market pricing supports further steepening
December 23, 2019
–From late Sept until Friday, the curve has steepened. German 2/10 bottomed at 14 bps in late Sept, and ended Friday at 38, a gain of 24 bps. In the US, 2/10 had bottomed in late August at -4, but from the time of the German low to now, US went from +1 to current 29, a gain of 28 bps. As the German curve flattened thru out the beginning of the year, it dragged EUR with it; now the euro is trying to rally, but if the US curve is getting relatively steeper, it will likely be difficult for the the euro to gain much upside traction.
–Friday was quiet with tens gaining 0.7 bp to 1.908%. Euro$’s were a bit weaker, with red pack the under-performer, closing -2.125. Two-year treasury auction today, followed by 5’s tomorrow and 7’s Thursday.. While the front white pack to reds as a spread prints -9.25, everything from reds back is positive. Red/green (2nd to 3rd) settled 7.875, green/blue (3rd to 4th) 9.875 and blue/gold (4th to 5th) 10.0. What is somewhat interesting is that the curve gets steeper further back. This is also reflected in nominal midcurve straddle levels, where greens are higher than reds and blues higher than greens: 0EM 9837.5^ 31.0s, 2EM 9837.5^ 36.5 and 3EM 9825^ 37.0. I would think this should correspond with increased term premium.
–January treasury options expire Friday, TYF0 128.25 straddle settled 26/64’s. One other note, FFF0/FFF1 one-year Fed fund calendar spread settled -17.5, up 2 bps on the day. As trade tensions edge toward easing (China cut tariffs this weekend), the market is pricing less of a chance for the Fed to cut next year.
