More certainty in rates?
March 18, 2022
–5/10 treasury spread came back to positive after inverting Wednesday, with fives -2.2 to 2.17% and tens +1 to 2.192%. However, on the eurodollar curve reds to deferred sank to new inverted lows. Red pack +0.875, greens +3.75, blues, +5.875 and golds +4.25. (Red/green settled -26.25 and red/gold -38.875). EDM’22 jumped 8.5 on the day to 98.565 and implied vol in rates continued to decline, now that some of the uncertainty about the Fed’s game plan has been reduced. As an example, a week ago Thursday EDU2 9825^ settled 71.5 and EDZ2 9800^ at 87.5. Yesterday, at-the-money EDU2 9812.5^ settled 54.0 and EDZ2 9775 at 71.0. So Dec is now where Sept was a week ago. There are six FOMC meetings left this year. A 25 bp hike at each would take the target to 1.75-2.00%; January ’23 FF is right at the upper end of that target at 9802.5 or 1.975%.
–Stocks have had an amazing post-Fed rally, but pulled back from highs late yesterday, perhaps due to a warning that Putin may become more vocal in terms of a nuclear threat. Big option expiration today. Long end of the treasury market had a terrible close yesterday with yields at new highs. Ten year ended at 2.19% which is exactly the 61.8 retrace from the 2018 high of 3.23% to the 2020 low of 51 bps. It wouldn’t be surprising for bonds to see temporary support here and indeed there is a minor bounce this morning with TYM +9.5 to 124-200.
–I received a text from a friend yesterday with an unsolicited but interesting quote on CLZ’23 500 calls, which were 0.30/0.80 (thanks PMV). I later looked at CLZ’22 300 calls and saw a market of 0.50/0.57. Front oil contracts are bouncing around just above 100. CLZ2 settled 88.12 and CLZ3 79.36. I guess this is the glass half-empty or full: The forward curve is saying oil prices are coming back down, but option markets reflect fear of an upward explosion.
–Existing Homes and Leading Indicators today.
