What happened to OMO?
September 26, 2023
–Now it’s just fear. Or at least a deep sense of unease. Yesterday, the thirty year bond led yields higher, ending up 13.7 bps at 4.655%. Vol exploded. For example, on Friday I marked the atm USZ 117^ at 4’48 ref 116-29. Yesterday the 115^ ref 114-27 settled 5’26. Even having taken weekend time value out of Friday’s mark, vol went from 12.5 to 14.6. The ratio of DV01 for FVZ to USZ is about 3.1. Yesterday the ratio of FVZ to USZ vol was over 3.0 (4.8/14.6). It is quite rare to see the vol ratio at nearly the same as DV01 ratio and it suggests that the bond sell-off may need to take a breather. In any case, liquidity will likely suffer in the near term. The fear I refer to is mostly in fixed income for now, however, VIX tested 18 and still closed with a gain at 17.49.
–Curve bear steepened. Since the Sept 20 FOMC, the 2/10 spread has gone from -77 to -59. 5/30 is now positive 4 bps. On the last day of August, the 30y yield was 4.21%; it has surged 44 bps in less than a month.
–China’s property woes continue to dominate headlines. DXY is at a new recent high near 106 and $/yen near 149. Financial conditions in the US are tightening quickly. At the end of 2018 the Fed made its last hike in December (to 2.25-2.5%), and then quickly was forced to pivot to ease in 2019. This isn’t that Fed. However, market conditions have a way of overwhelming the best laid plans.
–I never really discuss the political landscape, but….gold bars? Senator Menendez, you accepted gold as a bribe? I don’t care what party you’re from, that offense, if proven, should mean jail. The tepid response from our elected officials underscores the disgust that the general population holds for our current political infrastructure. Or maybe a better word is distrust. I was using ‘disgust’ for myself. In any case, shoveling billions of taxpayer funds out the door to special interests for personal gain might even be a contributing factor for bond market weakness. Is that a stretch?
–Today’s news includes Philly non-mfg survey and New Home sales expected 698k from 714k rate last.
