A Clue!
Happy Belated Independence Day!
I have been saying to institutional clients that the front of the yield curve has been trading “strangely” the past few months. I haven’t been able to pinpoint why the movement of the shape of the curve has been atypical, but I finally have some clues.
But first, the week in news:
· Payrolls came in much weaker than expected, but the Unemployment Rate fell. We will find out in ensuing months how much the World Cup added to payrolls, as those jobs will have to be removed. We may have started to see some of the WC “planning” jobs removed in last week’s data. There are still no signs of inflation pass-through to wages, which is one of the factors that the FOMC considers before hiking.
· Lisa Cook received a favorable Supreme Court decision, but Trump still vowed to go after her. This seems slightly counterproductive as the case could take about a year and this could cause Powell to stay longer. Since Powell is now just a Governor, I guess Trump wanted to go for the 2 for 1 Special.
· I mentioned this last week, but more places are suggesting that the removal of forward guidance will cause vol in front end to increase, and/or vol in longer end to decrease. As I discuss in today’s main essay, SFR6 (the 6th 3mo SOFR interest rate future) didn’t seem to get the memo, relative to SFR10. The logic of the Fed’s Summary of Economic Projections holding members to their rate view makes no sense, since they regularly change their dots – sometimes by a lot (see June). I like having as much data as possible to make the best decision possible, and it is disappointing that we may get less information.
· Warsh sounded less hawkish at Sintra. He said inflation risks declined the past 4 weeks and mentioned AI.
· I was surprised that Bowman (who is Trump-friendly) was thrown under the bus for participating in a closed-door conference before the FOMC meeting. I’m not saying she wasn’t wrong. I thought Trump protected his allies, but maybe this is a move for “appearances.”
A Note to Readers
The Curve Advisor began as a way to organize my own trading thoughts each week.
As markets continue to evolve, I’ve begun thinking about how I allocate my time. The value of the newsletter has always been the discipline of organizing my own trading process. Occasionally, that process leads to an observation or trade idea that meaningfully changes how I think about the curve. One differentiated insight can have an outsized impact on long-term performance.
As a result, I’m evaluating whether Curve Advisor should continue as a broadly distributed publication or evolve toward a model centered on a smaller number of direct institutional relationships, potentially with a greater degree of ongoing interaction. No decisions have been made, but if you have thoughts on the future direction of Curve Advisor or would like to discuss institutional access, I’d be happy to hear your feedback (CA@CurveAdvisor.com).
A Clue!
I was originally going to write this for just the institutional version of the newsletter, but then Lazy CA realized he would have to write something else for the main blog this week. I’m as patriotic as the next guy, so that was not something I wanted to do on the 4th of July weekend. I decided to include the first part (overview) of the writeup in the general blog. I think this will give you a flavor for some examples of ancillary considerations when trading interest rates.
I had someone do a regression (of values) of various SOFR futures calendar year spreads over various time frames. SFR6 is the 6th SOFR 3mo interest rate future. One of these things (betas) is not like the others. [cue Sesame Street music]
