The sea was angry that day
September 27, 2022
–Huge jump in yields yesterday with tens +18 bps to 3.87%. Implied vol exploded to the highest level since covid as attached chart indicates. Massive steepening on short end curves. SFRH3 was the strongest contract on the strip, closing +7 at 9539 (4.61%). SFRH4 9572.5, -13.0. SFRH5 9623.5, -20.5. SFRH6 9639.5, -23.5. Calendar spreads are still deeply inverted, but less so after yesterday.
–In the near 1-yr calendars, FFF3/FFF4 (a proxy for expected Fed action next year) settled at positive 22, up 9.5 on the day. SFRZ2/SFRZ3 settled positive 11.5. Like the FF spread, this SOFR calendar had been inverted for the past three months. At the start of August it was negative 60, in mid-Sept as low as -40. The adjustment to positive reflects a change in sentiment which respects the idea that Powell will resist a premature pivot toward ease. A collapse in asset prices and/or employment may yet overwhelm Powell’s resolve, but for now, FFF3 at a price of 9573 or 4.27% is still nearly 1.25% above the current EFFR.
–News today includes Durables, New Home Sales, Consumer Confidence and comments by Bullard. Regarding homes, a friend sent these mortgage quotes yesterday: Conforming 30yr fixed with >740 credit score, 6.75% to 6.875% for single family home and 7.0% for condo (thanks RR). Average home price is $430k. 80% mortgage is $344k. At 3% (available at start of the year) the monthly pay is $1450. At 6.75% it’s $2231 or 54% higher.
