Selling pressure on front end
September 27, 2024
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–Main feature yesterday was weakness in front end. Almost like a delayed reaction to Wednesday’s large block sale of 118k SFRZ4 at 9606.5; on Wed SFRZ4 settled 9606, but yesterday it dropped 5.5 to close at 9600.5. Vol was bid. Changes from Wednesday to Thursday: SFRZ4 9606.25^ 28.75 to 31.25. SFRZ4 9600^ 28.5 to 30.0. 2yr note rose 6.9 bps to 3.62% while the 10y was up less than 1 bp to 3.789. In another example of flattening, SFRM5 was the weakest contract on the strip, -9 at 9685. M6 was -5.5 at 9702.5, M7 -2.0 at 9690.5 and M8 unch’d at 9679.5. Despite pressure on Z4, Z5 was a bit weaker yet at -7.0 (9703), so Z4/Z5 spread edged to a new high -102.5
–Yesterday I had noted that 2/10 was testing its 50% retracement (~25 bps) from the 2021 high to 2023 low. Perhaps that was a target area that some used as an exit level; 2/10 fell from 23 to 17 yesterday.
–Despite front end selling, there is continuous accumulation of SFRV4 9618.75/9625cs for 1, about 65k yesterday. This trade requires high certainty of a string of 50 bp eases. Simplistically, EFFR is now 4.83% vs the lower strike 3.8125%; ~100 bp difference. So even if we know 50 and 50 are coming, that still doesn’t quite get us over the hurdle for the call spread to fill out…need Jan too. Oct options expire on 11-Oct, capturing the employment report. Same cs in Nov settled 1.25, but of course November expiration covers another employment report, the election and FOMC on 7-Nov. So what difference does an election make? Well, $/yen has dropped about 1% today to 143.29 on Shigeru Ishiba’s victory in Japan. $/yen is nearing the level it reached on Aug 5, which sent tremors through markets relating to yen-carry unwinds.
–Speech yesterday by Fed Vice Chair for Supervision seemed to have an undertone of bank monetization of US debt. Perhaps that’s a stretch, but there seems to be emphasis on banks holding treasuries. From Barr:
When firms understand that they will not be fully constrained by the capacity of private markets or their individual credit lines to monetize HQLA immediately in stress, they can reduce their demand for reserves in favor of Treasury securities, all else being equal, for their stress planning purposes. This dynamic improves the substitutability of holding reserves and holding Treasury securities either outright or through repo transactions.
–Below I’ve included a chart of BBB/Baa spread to treasuries. No stress apparent.
–PCE prices expected 0.1 with Core 0.2. Yoy expected 2.3 from 2.5 last and 2.7 from 2.6 last.
