US TSYS: Light Bull Steepening Sees Yields Fall Slightly For The Week
The Treasury curve bull steepened slightly Friday, with 10Y yields falling on a weekly basis for the first time since mid-September.
- Futures softened in overnight trade with early twist steepening, with short-ends supported by a dovish ECB sources article by Reuters.
- But Tsys bottomed and remained well within the week's ranges, and rallied just before 0830ET in the only notable price movement of the session. There was no obvious trigger of the move, which coincided with another sharp pullback in oil prices following this week's earlier downside geopolitical shocks.
- The curve bull flattened slightly in the rally, only to re-steepen slightly toward the close. After hitting session highs (109-09+), TYs pulled back and traded in a 5-tick range the rest of the day, with volumes on the light side (about 90% of the 5-day average).
- Housing starts/permits activity came in weaker than expected, underlining that residential construction remains one of the economy's clear weak points but not really casting much doubt over the overall ongoing economic expansion (Atlanta's GDPNow remained at 3.4% for Q3).
- FedSpeak was relatively limited: Atlanta Fed Pres Bostic said “I’m not in a rush to get to neutral" on rates - recall he'd previously said he's looking for one more rate cut this year. Fed cut pricing was little changed on the day (around 1-2bp lower through early 2025).
- Dec 10-Yr futures (TY) up 5.5/32 at 112-07 (L: 111-29.5 / H: 112-09.5). In cash, the 2-Yr yield is down 2.8bps at 3.944%, 5-Yr is down 2.6bps at 3.8728%, 10-Yr is down 1.8bps at 4.073%, and 30-Yr is down 1bps at 4.3799%. 5Y/ 10Y and 30Y yields fell around 3bp each on the week (first drop for those since w/e Sept 13).
- With a limited docket of impactful events on next week's schedule, focus will be on weekly jobless claims data and flash PMIs, with appearances by FOMC members Logan and Schmid featuring Monday, and the Fed's Beige Book out Wednesday.
SOFR FIXES AND PRIOR SESSION REFERENCE RATES
US TSYS/OVERNIGHT REPO: SOFR Softens, Should Ease Further Friday
SOFR softened very slightly Thursday from elevated levels Tues-Weds, dipping 1bp to 4.85%. This was largely expected after the Treasury coupon settlement-related uptick earlier in the week. While SOFR is a volume-weighted median, the skew of SOFR percentile rates remains somewhat elevated (99th percentile minus 1st 17bp, 75th minus 25th 10bp, compared with respectively 14bp/ 6bp at the same time last month post-FOMC).
- SOFR is expected to subside further today in part due to an influx of GSE cash (the 18th is Fannie / Freddie Mae Monthly P&I Remittance day). This should also be reflected in an uptick in ON RRP facility takeup today.
- Effective Fed funds rates remained unchanged.
REPO REFERENCE RATES (rate, change from prev. day, volume):
- Secured Overnight Financing Rate (SOFR): 4.85%, -0.01%, $2334B
- Broad General Collateral Rate (BGCR): 4.84%, no change, $826B
- Tri-Party General Collateral Rate (TGCR): 4.84%, no change, $794B
New York Fed EFFR for prior session (rate, chg from prev day):
- Daily Effective Fed Funds Rate: 4.83%, no change, volume: $96B
- Daily Overnight Bank Funding Rate: 4.83%, no change, volume: $249B
US: SOFR FIX - 18/10/24 - Source BBG/CME
- 1M 4.75906 -0.00009.
- 3M 4.63163 0.01423.
- 6M 4.44371 0.02835.
- 12M 4.13231 0.0432.
US TSYS/OVERNIGHT REPO: ON RRP Takeup Dips, No Threat To Reserve Abundance Yet
Overnight reverse repo facility takeup fell to $259.9B Friday, the 4th consecutive daily decline but only marginally lower than $262.2B Thursday.
- There had been some expectations that this would start rebounding as GSE funds entered the market, but this may have to wait until Monday.
- As we noted Thursday, there are no major signs that reserves are anything but abundant - and above the threshold at which the Fed would consider halting QT.
- Overall, reserves + ON RRP totaled $3.5T as of Wednesday (per Thursday's Fed weekly balance sheet release), which is well above levels thought to be scarce (starting somewhere around $3T). In the last 4 weeks, reserves are up $12B, with dealer ON RRP down $34B.
US SOFR/TREASURY OPTION SUMMARY
Friday's US rates/bond options flow included:
- SFRZ4 95.62/95.75cs 2x3 vs 2x 95.50p, sold the 2x put at 3.25 in 5k.
- 0QX4 96.43/96.31/96.12/96.00p condor, traded for 3 in 1.5k.
- 0QX4 96.50/96.25/96.12p fly traded 6 in 5k.
- TY weekly 112.50 calls expiring on October 23, next Wednesday. * 10K blocked at 0-05
- TYX4/TY Week 1 112put spread, bought for 16 in 13k. This was also bought for 15 in 2k total 15k.
- TYX4 113c, bought for 3 in 10k.
BONDS: EGBs-GILTS CASH CLOSE: Short-End, BTPs Gain On Upped 50bp ECB Cut Pricing
The German and UK curves bull steepened Friday with periphery EGBs outperforming as near-term ECB cutting prospects mounted.
- European core FI got off to a weak start, after UK retail sales printed above-expected. But those data were not seen as a major driver for the BoE, and the lows were set in the morning. Global instruments rebounded for most of the European afternoon session, with softer oil prices and US housing construction data adding tailwinds.
- Throughout, the main story of the session was the rising possibility of an outsized ECB cut in December, as Reuters reported that some policymakers wanted to soften guidance on rates at Thursday's meeting.
- Current OIS ECB meeting-dated pricing sees a 40+% probability of such an outcome, up another 6pp today, with around another half-a-25bp cut further priced through the next 2 meetings (2.57% Jan 30, vs 2.70% at Wednesday's close).
- The short end of the German curve outperformed its UK counterpart (reflecting ECB repricing), but vice-versa at the long end.
- Periphery EGBs outperformed overall, with Italy leading the pack. Rising optimism over ECB easing saw 10Y BTP/Bund closed at the tightest levels since September 2021. Note that S&P and Fitch review Italy's sovereign rating after the market close. S&P reviews Greece.
- Next week we get multiple ECB (Lagarde, Lane, Villeroy, etc) and BoE (Bailey, Mann) speakers, while the data highlight will be flash October PMIs.
Closing Yields / 10-Yr Periphery EGB Spreads To Germany:
- Germany: The 2-Yr yield is down 3.8bps at 2.108%, 5-Yr is down 3.2bps at 2.018%, 10-Yr is down 2.5bps at 2.183%, and 30-Yr is down 2.3bps at 2.5%.
- UK: The 2-Yr yield is down 3.4bps at 3.997%, 5-Yr is down 3.5bps at 3.911%, 10-Yr is down 3.3bps at 4.056%, and 30-Yr is down 2.6bps at 4.589%.
- Italian BTP spread down 3bps at 117.5bps / Greek down 2.3bps at 84.6bps
EUROPE OPTIONS: Decidedly Mixed Trade Friday As Easier ECB Implications Digested
Friday's Europe rates/bond options flow included:
- OEX4 119/118.5/118p fly bought for 3 in 1k
- RXZ4 136.50/138.50 call spread sold at 16.5 in 7k
- ERX4 97.00/96.875 put spread sold at half in 8.5k
- ERJ5 98.12/97.50 put spread bought for 22.5 to 22.75 in 5k (vs 98.015)
ERJ5 98.25/98.62 call spread bought for 7.0 in 2.5k
FOREX: USD Index Edges Lower Friday, Set to Post 0.6% Advance This Week
- Solid price action for equities and waning topside momentum for the greenback has seen the USD index slide 0.3% on Friday. Weaker-than-expected housing starts and building permits data may have weighed at the margin, helping the DXY further ease of the recovery highs posted Thursday.
- The index remains roughly 0.6% higher on the week, as markets take a moderately more hawkish view of the Fed’s terminal rate for this easing cycle and Former President Trump laid out his positive views on potential tariffs and asserting that he’d use them to defend the dollar’s reserve currency status.
- This narrative particularly supported USDMXN this week, with the pair looking set to close 3% higher as uncertainties surrounding the US election and concerns regarding the Chinese fiscal stimulus permeate. Market participants will be cautious of further strength towards the highest levels of the year, situated at 20.2181.
- GBP continues to trade in positive territory Friday on the back of a better-than-expected set of retail sales numbers this morning, with both metrics topping expectations on both an including- and excluding-auto fuels basis.
- EUR/GBP briefly extended losses, building on yesterday's dovish momentum following the ECB decision, touching new pullback lows of 0.8295 as a result. This marks a bearish break for the cross, opening support at 0.8250 and 0.8203 beyond, however, the cross has bounced to 0.8330 as we approach the weekend close. In similar vein, EURUSD rose back to 1.0865 and stands around half a percent off the post ECB 1.0811 lows.
- Next week will be highlighted by the IMF Annual Meetings and the Bank of Canada decision.
FX OPTIONS: Expiries for Oct21 NY cut 1000ET (Source DTCC)
- EUR/USD: $1.0775(E535mln), $1.0885-00(E2.1bln), $1.0930-40(E900mln), $1.1000(E1.6bln)
- AUD/USD: $0.6590(A$2.2bln), $0.6825-40(A$2.3bln), $0.6955(A$1.8bln)
- USD/CAD: C$1.3800($715mln)
USD/CNY: Cny7.1500($644mln)
EQUITY TECHS: E-MINI S&P: (Z4) Northbound
- RES 4: 6012.75 1.00 projection of the Aug 5 - Sep 3 - 6 price swing
- RES 3: 6000.00 Psychological handle
- RES 2: 5961.00 1.00 projection of the Sep 6 - 17 - 18 price swing
- RES 1: 5927.25 High Oct 17
- PRICE: 5891.25 @ 14:33 BST Oct 18
- SUP 1:5807.48/5724.00 20-day EMA / Low Oct 2
- SUP 2: 5722.04 50-day EMA
- SUP 3: 5675.25 Low Sep 18
- SUP 4: 5658.00 Low Sep 13
S&P E-Minis trend conditions are unchanged and bulls remain in the driver’s seat. Recent gains confirm a resumption of the primary uptrend and maintain the bullish price sequence of higher highs and higher lows. Note that moving average studies are in a bull-mode setup, highlighting a dominant uptrend. Sights are on 5961.00, a Fibonacci projection. Initial support to watch is 5807.48, the 20-day EMA.
COMMODITIES: Gold Extends Gains To Fresh Record High, Silver Near 12-Year High
- Precious metals have risen once more on Friday, with spot gold rising a further 0.9% on the session. The yellow metal looks set to expand its winning streak to four consecutive sessions, further extending to fresh record highs of $2,720/oz earlier today.
- Analysts note that US election hedges and on-going geopolitical uncertainties could drive gold higher near-term.
- The clearance of $2,700 reinforces current bullish trend conditions, with sights on $2737.8 next, a Fibonacci projection.
- Spot palladium prices have also risen by a further 3.8%, past $1,080/oz, part of the broad rally seen across precious metals and the softer greenback today.
- Meanwhile, silver is outperforming and is up by 5.2% at $33.3/oz, its highest level since December 2012.
- Silver has pierced resistance at $33.297, a Fibonacci projection, with attention on $33.738 next.
- In contrast, oil markets have faced further pressure on Friday as the geopolitical risk premium fails to hold up with no actual impact on Iranian flows and fears of a strike on infrastructure fading.
- WTI Nov 24 is down by 1.7% at $69.5/bbl.
- For WTI futures, a bearish extension would threaten the recent bullish theme and expose support at $66.33, the Oct 1 low, and $64.61, the Sep 10 low and a key support.
| Date | GMT/Local | Impact | Country | Event |
| 18/10/2024 | 2000/1600 | ** |  US | Treasury Budget |
| 21/10/2024 | 0400/0500 |  GB | BOE Greene's opinion piece in Financial times | |
| 21/10/2024 | 0600/0800 | ** |  DE | PPI |
| 21/10/2024 | - |  EU | ECB's Lagarde and Cipollone participate in IMF/World Bank Meetings | |
| 21/10/2024 | 1255/0855 | US | Dallas Fed's Lorie Logan | |
| 21/10/2024 | 1530/1130 | * | US | US Treasury Auction Result for 13 Week Bill |
| 21/10/2024 | 1530/1130 | * | US | US Treasury Auction Result for 26 Week Bill |
| 21/10/2024 | 1700/1300 | US | Minneapolis Fed's Neel Kashkari | |
| 21/10/2024 | 2105/1705 | US | Kansas City Fed's Jeff Schmid | |
| 21/10/2024 | 2240/1840 | US | San Francisco Fed's Mary Daly | |
| 22/10/2024 | 0600/0700 | *** | GB | Public Sector Finances |
| 22/10/2024 | 0900/1000 | * | GB | Index Linked Gilt Outright Auction Result |
| 22/10/2024 | 1230/0830 | * |  CA | Industrial Product and Raw Material Price Index |
| 22/10/2024 | 1230/0830 | ** | US | Philadelphia Fed Nonmanufacturing Index |
| 22/10/2024 | 1255/0855 | ** | US | Redbook Retail Sales Index |
| 22/10/2024 | 1325/1425 | GB | BOE's Bailey address at Bloomberg Global Regulatory Forum | |
| 22/10/2024 | 1345/1445 | GB | BOE's Greene fireside chat with Josh Lipsky | |
| 22/10/2024 | 1400/1000 | ** | US | Richmond Fed Survey |
| 22/10/2024 | 1400/1600 | EU | ECB's Lagarde in conversation with Francine Lacqua | |
| 22/10/2024 | 1500/1700 | EU | ECB's Lane in fireside chat at Seminar of Bank of New York | |
| 22/10/2024 | 1530/1130 | * | US | US Treasury Auction Result for Cash Management Bill |
| 22/10/2024 | 1915/2115 | EU | ECB's Large in panel discussion on cross border payments | |
| 22/10/2024 | 2000/2200 | EU | ECB's Lane at Columbia University seminar | |
| 22/10/2024 | 2015/2115 | GB | BOE's Breeden panellist at G20 cross-border payments event |
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