Set up, like a bowlin’ pin
October 17, 2022
–Continued weakness in the short end of the curve Friday. The 2y note rose 5.2 bps to 4.501% while tens were up 5.0 to just over 4%. The 2/10 treasury spread closed at -50, the lowest since April 2000. On the dollar curve, the red pack fell 7.75 bps to a price of 95.47125 or just over 4.5%. All one-year calendars on the euro$ strip are inverted; the red/green pack spread made a new low of -54.75. The lowest contract remains EDH3, which settled 9476 or 5.24%. The most inverted 1-yr calendar is EDM3/M4 at -79.
–EDH3 at-the-money straddle settled Friday at 68 bps (9475^ vs EDH3 9476.0, 148 days til expiry). Nine months ago, on January 13, EDH3 settled 9860.5. At the time, EDH2, the front contract was 9959.0; tightening had not yet started, but the market was expecting hikes: EDH2/EDH3 was positive 98.5. At the time, I would have said the market is expecting FOUR 25 bp hikes. How quaint. On January 13, 2022, EDH3 9862.5^ settled 60.0 with 424 days until expiration. So nine months ago, the atm straddle on the exact same contract was cheaper (in nominal bps) than it is now. Of course, in the intervening period the Fed raised FFs by 300 bps. By the way, in January, the longest dated green straddle was EDZ’24 which settled 113 bps ref 9807.0 (1068 dte). Currently, the last long-dated green straddle is EDU6 which settled 207.5 ref 9611.5. So the straddle is almost twice as high, but the relative price of the last green has not even moved 200 bps. What a long, strange trip it’s been.
