Putting out fire…with gasoline
April 6, 2022
–Key line from Brainard speech:
…the Committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting. Given that the recovery has been considerably stronger and faster than in the previous cycle,
–Yields exploded to new highs, with tens up 14 bps to 2.548%. New highs in near euro$ calendars. EDM2/EDU2 three month spread rose 3.5 to 74. EDM2/EDM3, the peak one-year calendar, and of course, the nearest, surged 8 to 181, the highest for any one-year spread in this cycle. (Usually, one-year spreads only reach this level on aggressive EASING from higher rates). The curve steepened with 2/10 back in positive territory to 5 bps, up 6.5 on the day. On the euro$ curve, reds (2nd year) fell 10.25 bps, but golds (5th yr) plunged 22.25 as balance sheet reduction is expected to steepen the curve. Daly also said balance sheet reduction could start in May; today’s FOMC minutes have been preempted.
–Gasoline cost too much? We’ll sell from the SPR. Don’t want to pay the student loans? We’ll extend the moratorium on payments until August. The Federal gov’t tries to protect the voting base from all pain. However, Brainard yesterday noted that low income households pay around 45% of their income towards housing, while high income HHs spend about 18%. The thirty-year mortgage rate just hit 5%, compared to about 3% at the start of the year, taking monthly mortgage payments up 27%. What should the Fed’l gov’t do about that? Housing activity already slowing, and the percentage growth of M2 has slowed dramatically.
–The low contract on the ED curve is still EDM3 at 9658 or 3.42%. Note these high yield levels in treasuries from 2018: 5yr 3.08%, 10yr 3.23%, 30yr 3.455%. Currently, EDM3 is closing in on the 30yr high from 2018! But not only that, there are buyers of protection in case the Fed moves its timetable even more rapidly: for example, there was a new buyer of 15k EDU2 9650p for 5.0. EDU2 settled 9765.0!! Massive premium. Also, the long dated ED straddles are at nosebleed levels. Example, EDH4 9675^ vs 9681 settled 157.25 and EDH5 9712.5^ vs 9711.5 settled 182. I haven’t double checked, but these might be the highest nominal levels I have seen.
