{US} STIR: SFR/ED Spreads Back From Cycle Extremes On Policymaker Action But Nowhere Near Retracing SVB-Inspired Move

SOFR/ED spreads pull back from cycle extremes after a fresh round of widening kicked in early today.

• The initial bout of widening came on the lack of immediate resolution re: the SVB saga, despite positive indications on that front.
• Since then, the pull back from fresh cycle wides in SOFR/ED spreads was facilitated by the introduction of the Fed’s BTFP, along with the FDIC deploying the ‘systemic risk exception’ to protect uninsured depositors in two bank resolution situations (failures of SVB last week and Signature Bank over the weekend, with talk of the latter perhaps feeding the initial widening in SOFR/ED spreads today). These measures were deployed to mitigate worries re: bank runs.
• The SOFR/Eurodollar M3 spread sits just off session tights, after tapping the widest level of the current cycle this morning.
• Policymaker action has taken the edge off of the situation, but we are nowhere near pre-SVB levels, with jitters still remaining evident (a Tsy official has noted that policymakers will consider additional actions to further strengthen the financial sector).
• Fed-dated OIS now prices 23bp of tightening for next week’s meeting, after pricing ~43.5bp of tightening at one point last week. This is the first time since 7 Feb that pricing for the meeting has showed below 25bp. Terminal rate pricing hovers around 5.05%, trimming over 20bp on the day, while ~40bp of cuts is now priced into the FOMC-dated OIS strip by year end (from the terminal rate).

Fig. 1: SFR/EDM3 Spread

Source: MNI - Market News/Bloomberg