Mission accomplished by June
November 1, 2022
–Weakness in interest rate futures being reversed this morning. At futures settle, the ten year yield was up 7 bps at 4.08% with TYZ2 110-19. Current TYZ2 is 111-06. The Treasury’s refunding announcement was initially met with selling as 4th quarter borrowing needs rose to $550 billion, $150b higher than the initial estimate. However, a brief sell-off in futures was quickly erased.
https://home.treasury.gov/news/press-releases/jy1063
–In short term rates, SFRZ2/EDZ2 spread settled at a new high of 50 bps, and was 50/50.5 late. This spread is nearly double the 26 bp transition SOFR to ED fallback level. The lowest one-year eurodollar calendar spread is EDM3/EDM4, which posted a new low for any 1-yr calendar this cycle at -85.5. In SOFR. M3/M4 is also the lowest, trading -82 late in the session. Some notable new buys in 0QZ2 puts (Dec midcurves on SFRZ3). The 9500p was bought on block at 9.5 21k, settled 9.0 vs 9546.0. 0QZ2 9512.5p 12.0 paid 15k covered 9548; settled 12.25. The 9550 atm straddle settled 51.5. Appears to have been some expensive FOMC downside insurance. The RBA hiked 25 bps to 2.85% (expected) and raised the inflation estimate for this year to 8%. The Fed is expected to hike 75 tomorrow, but the inversion of 2023 to 2024 contracts indicates that the market is just as certain that eases are eventually coming. It was just over 2 months ago at Jackson Hole that Powell vowed to stay tight until the job is done. The market is pegging that window of time to be in the middle of next year.
–USD is weaker this morning, supporting stocks and commodities. News today includes JOLTS expected 10m. ISM Mfg expected 50, but could easily print lower which would indicate contraction. ISM Mfg Prices expected 52.5.
