Policies, politics and provocations
January 25, 2024
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–ECB meeting today. As usual, news articles are advancing the idea of a Central Bank push-back against near term ease. Reasonable enough, I guess. But calendar spreads in futures continue to signal significant rate cuts. At yesterday’s settles, ERH4/ERH5 -143.5 (9616/9759.5) and SFRH4/SFRH5 -146.0 (9484/9630).
–The Fed announced yesterday it will not renew the Bank Term Funding Program and immediately raised the rate going forward until the program expires in mid-March. This band-aid was instituted due to the regional bank crisis in March of last year. Banks could pledge treasuries at par (even at market prices well below par) and borrow up to a year at OIS +10 bps. This created positive carry as t-bill/ff rates are significantly higher. In December the Fed approved Norinchukin NY branch as a participant; balances increased from about $114b in December to $161b now. I suspect political pressure to end the program started at the same time. The size really isn’t large enough to have a major market impact in my opinion, though discount window usage is likely to surge. The fact that treasuries have rallied and prices are closer to par probably eased some pressure as well.
–Reports this morning that Ukraine hit a Rosneft Refinery. CLH4 currently up over a dollar at 76.26.
–Poor 5y auction: 4.035% at 1:00pm, actual result 4.055, a 2 bp tail. Bid/cover just 2.31. Sevens today.
–Q4 advance GDP expected 2.0. Atlanta Fed GDPNow at 2.4% as of Jan 19. Jobless Claims 200k from 187k last. New Home Sales expected 649k
–A surge to new highs failed in ESH, from up 38 points at high to slightly negative at end of day. After the close TSLA warned of slower growth, down 2.3% in the afternoon and about 7% now.
–Yields a bit higher across the board yesterday. On the SOFR strip reds to golds down 2.5 to 5 bps. In treasuries 10s and 30s up 3.6 bps to 4.176% and 4.411%.
–Attached chart shows the > 100 bp drop in the 30y yield from end of October to end of December, the start of which corresponded to the Treasury’s Quarterly Refunding Announcement which weighted new issuance toward the short end. All yields dropped, so while the auction details may have had an impact, it’s just one factor of many. In any case, the next QRA is January 31, same day as FOMC. Certainly the FOMC will also include discussions about trimming QT. My thought is that 30’s will go into that meeting around the halfway point of the previous two-month rally, that is, around 4.53% or about 12 bps higher than late yesterday. I would guess around 117-16 in USH. If using highs and lows on the USH4 contract, 10/23 low was 107-03 and 12/27 high was 125-30, so halfway is 116-16.
