Then suddenly
July 2, 2024
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“How did you go bankrupt?”
Two ways. Gradually, then suddenly.”
–From Hemingway’s The Sun Also Rises
The Hemingway quote is probably overused, but it naturally came to mind when reading Bill Dudley’s piece from last week (6/26):
It’s impossible to know when investors will decide that such risks are too much to bear, as the bond vigilantes famously did in the 1990s. When it happens, it tends to be sudden and brutal. This is the concern that should be paramount.
–The bond market seems to be suddenly reacting to a confluence of negative factors, including crushing supply, higher oil prices, lack of confidence. Since Thursday’s mark at settlement, the 30y yield has surged from 4.426% to 4.641% or 21.5 bps. Selling continued even as yesterday’s ISM Mfg was weak, with the employment sub-index falling to a contractionary 49.3 from 51.1 last. JOLTs today expected 7.955m vs last at 8.059.
–It’s a bear steepener. In contrast with the bond sell-off, SFRZ4 rose only 1.5 bps in yield since Thursday, falling from 9514 to 9512.5. Yesterday the 2y note was up 5.4 bps to 4.77%, while 10s jumped 13.8 to 4.477% and 30’s +14.1 to 4.641%.
–2/10 at new recent high -29.3, up 8.4 on the day. 5/30 new recent high 20.4 up 3.1 on the day. All back SOFR one-year calendars made new recent highs as futures prices were successively weaker down the curve. Net changes: SFRZ4 -2.0 to 9512.5, Z5 -10.5 to 9592.5. Z6 -14.5 to 9614.5 and Z7 -16.5 to 9617.0. SFRU4/U5 is still the most inverted 1-yr calendar, but yesterday it popped 8 bps to -95 (U4 down only 0.5 while U5 fell 8.5).
–The numbers are horrendous but generally glazed over. I was struck though, by an article in BBG highlighting Chicago’s never-ending, and worsening, pension problems, even as portfolios should be soaring:
The net pension liability across the city’s four retirement
funds rose about 5% to $37.2 billion as of Dec. 31, up from
$35.4 billion a year earlier, according to Chicago’s latest
annual financial report.
–Back to the quote at the top of the page. Sudden realizations:
Bond yield too low given profligate gov’t spending? Adjusts all at once.
Biden cognitively impaired? There were *ahem* clues. But the press response…all at once.
European youth sick of the left’s rules? Rapid shift away
One might ask the question whether a quick shift might occur regarding the rosy prospects of AI and big tech. The large cap tech stocks have almost acted like ‘flight-to-quality’ long dated assets, similar (but better) than bonds. Sudden change in growth scenarios?
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Interesting trade yesterday; synthetic steepener:
+5k 3QU 9612/9562ps vs sell 0QU 9562/9525ps… pay 3.25 to 3.5. The 3QU put spread settled 13.5 and 0QU 11.25.
Spread is synth long U5/U7, futures settles 9579.5 and 9617.5. That spread has jumped from -50 to -38 in two days.
THIS IS NOT A RECOMMENDATION… but it is a reasonable way to express the steepener on the SOFR curve. All options expire 13-Sept, 2024.
