Wide range of possibilities
April 13, 2022
–Lower than expected core inflation of 6.5% sparked talk of ‘peak inflation’ which translated into a plunge of shorter maturity yields. The two year note fell nearly 12 bps to 2.385%, 5s down 11.2 to 2.671%, 10s down 5.5 to 2.721%. At the start of April, the 2/30 treasury spread went slightly inverted. Yesterday it hit a new recent high of 44.3 as the 30 bond yield actually rose 1 bp to 2.828%. On the euro$ strip the reds surged 19 bps while golds were only up 7. The red/gold pack spread bottomed April 1 below -87 bps and yesterday settled -28. January 2024 FF were up 19.5 bps to 9701.5, or just under a rate of 3%, essentially trimming one 25 bp hike. The thought is that if official inflation stats start to decline, then the Fed will not be forced into adopting the hawkish path outlined by Bullard et al.
–Here’s a quote attributed to GS, “today’s CPI release is a reminder that there still exists a non-zero probability that all of the inflation we have seen the past year is indeed transitory – the product of pandemic balances that constrained supply chains, kept people out of the workforce, and fed an unusual consumer demand for stuff.” Thanks for the insight. There’s also a non-zero probability that inflation will stay well above the Fed’s target even if the economy slows dramatically, which appears will occur. In any case, we get PPI today, expected 10.6%, along with a 30 yr bond auction. This morning we’ll also get JPM’s earnings call. Again, it’s not a big data-point, but NFIB small business optimism fell yesterday to 93.2. The post-pandemic high was around 104; it’s now approaching the pandemic low.
–Premium fell pretty hard on the rally with TYM2 120.5^ at 2’26 or 7.8 from 8.3 on Monday. Interesting trade in eurodollars was a sale of 500 long green 9700 straddle strip at 656. Long greens are EDM4, U4, Z4 and H5, and the options expire at the same time as the futures. The atm strip on monday had settled over 690. Yesterday, the 9700 straddle strip settled 671.25 as there were two new block call buyers after the strip had traded. Late in the day a buyer of EDH4 9750c for 56.0 in size 17.5k and EDM4 9750c for 61.0, 15.4k. Settlements were 50.75 vs 9698.0 and 58.5 vs 9705.0. These positions are new open interest. Long greens were never particularly liquid, but these prints vs settlements are indicative of a high degree of looseness. The straddle strip seller was marked ~3.5 bps against on each straddle, and the call buyer had the same experience, the other way. In fact, as I have mentioned, bid/ask quantities along the eurodollar (and SOFR) strip are declining. US interest rate contracts are among the deepest and most liquid in the world. If there’s a decline in liquidity here, it’s probably a warning across markets and in a broader sense, the rate markets are the basis for all valuations.
